Health Care Cost and Access Problems Intensify

By the spring of 2003, the American health care system was heading deeper into trouble. Costs were climbing at double-digit rates, employers were pushing expenses onto workers at a pace not seen in years, and the managed care model that had briefly tamed spending during the 1990s was in clear retreat. The Center for Studying Health System Change (HSC) documented these developments through its 2002-03 site visits to 12 nationally representative communities, painting a picture of a market where every major player -- insurers, hospitals, physicians, and employers -- was struggling to adapt, and where confidence in market-driven solutions was fading fast.

A Familiar Pattern Returns

The story had a familiar ring. In earlier years, managed care had lost its grip after a sustained consumer backlash against restricted provider networks and limitations on care. Health plans responded by broadening networks and easing utilization controls, which gave patients more freedom but stripped insurers of the leverage they once used to negotiate discounts from hospitals and physician groups. With fewer restrictions on care, utilization climbed, hospital capacity tightened, and providers found themselves in a stronger bargaining position than they had occupied in years.

By 2003, these trends had intensified on virtually every front. Contract showdowns between hospitals and health plans threatened patients' continuity of care. Emergency department diversions remained a serious concern. And a new phenomenon was becoming increasingly visible: hospitals and physician groups were pouring resources into competition for high-margin specialty services -- cardiac care, orthopedics, cancer treatment -- while broader capacity problems in areas like emergency care and general inpatient services went unaddressed.

Employers Shift Costs to Workers

With the economy slowing and health insurance premiums posting three consecutive years of double-digit increases, employers were moving more aggressively to transfer health costs to their employees. The situation carried echoes of the early 1990s, when a similar combination of economic downturn and surging premiums had pushed employers toward tightly managed care. But there were key differences this time around. The labor market in 2003, while softer than the late-1990s boom, was not as deeply depressed as it had been a decade earlier. Employers were cautious about pushing too hard on benefits when the national unemployment rate stood at roughly 6 percent.

More significantly, the optimism that had surrounded managed care in the early 1990s was absent. Instead, employers were pinning modest hopes on a fledgling "consumerism" movement in health care -- the idea that giving workers more financial skin in the game would lead them to shop more carefully for medical services. The information infrastructure needed for that kind of comparison shopping, however, barely existed. Price and quality data were scarce, making consumer-driven health care more of a long-term aspiration than a near-term solution.

In practical terms, employers were raising premiums contributions for workers, increasing copayments and deductibles, and in many cases replacing flat copayments with coinsurance arrangements where employees paid a percentage of the total price for services. Some unionized and public-sector employers were requiring up-front premium contributions from workers for the first time. The net effect: a steadily growing share of health care costs landing directly on employees' paychecks.

Health Plans Profit but Lose Influence

Most health plans were in better financial shape than they had been two years earlier, primarily because premium increases had outpaced medical cost growth and plans had exited unprofitable lines of business, including some Medicare and Medicaid contracts. But improved balance sheets did not translate into improved market power. Without a strong mandate from employers to reimpose tough cost controls, plans had few tools at their disposal.

Broad provider networks had become the market standard, which meant plans could no longer credibly threaten to drop hospitals as a negotiating tactic. Global capitation -- where providers assumed full financial risk for patients' care in exchange for fixed payments -- had all but vanished in most markets. Even primary care capitation was declining. Many plans had scaled back prior authorization requirements and primary care gatekeeping, and some had pulled back from conventional disease management programs. Preferred provider organizations (PPOs) had overtaken health maintenance organizations (HMOs) as the dominant insurance product.

Plans were experimenting with new designs -- tiered-provider networks that sorted hospitals into different cost categories, consumer-driven high-deductible plans with personal spending accounts, and customizable benefit packages. But these products were largely still on the drawing board or had attracted few takers. Hospitals in several markets actively resisted tiered arrangements, refusing to participate or leveraging their negotiating power to avoid being placed in high-cost tiers.

Quality Improvement Takes a Back Seat

Quality of care remained a secondary concern for most purchasers across the 12 HSC sites. Employers were focused on cost containment, and few were actively pressing plans and providers to demonstrate high-quality performance or improve patient safety. Two beliefs appeared to limit employer engagement: a general assumption that quality was already adequate in their communities, and a sense that meaningful reform was beyond any single employer's capacity to drive.

Even in communities where the Leapfrog Group -- a national coalition of purchasers focused on reducing medical errors -- had an active presence, employer influence on local quality and safety efforts was limited. Hospitals, however, were paying more attention to patient safety in response to high-profile reports from the Institute of Medicine and new accreditation standards from the Joint Commission. Some health plans were also developing provider incentive payment programs that rewarded physicians for meeting quality and efficiency benchmarks, though it was unclear whether the bonuses would be large enough to alter practice patterns.

Providers Drive Costs Higher

Freed from managed care's tightest constraints, hospitals and physicians pursued two primary strategies to strengthen their financial positions: negotiating harder with health plans for better payment rates and investing heavily in lucrative specialty services and technology. Hospitals with geographic advantages, strong brand recognition, or affiliations with larger systems held the strongest negotiating cards. In some communities, hospitals pushed contract negotiations to the brink, triggering standoffs that risked disrupting patients' access to their regular providers.

Competition for specialty services intensified markedly. In Indianapolis, six new specialty hospitals opened or were under development. In Seattle, medical groups were opening ambulatory surgery centers and adding radiology, laboratory, and imaging capabilities to their office practices. Large single-specialty groups were forming in fields like orthopedics and cardiology, driven by the economics of incorporating expensive diagnostic and treatment equipment. At some hospitals, entire profit margins depended on a handful of service lines, particularly cardiac care.

The consequences of this niche competition were ambiguous. If demand was strong enough and volumes held up, new facilities might deliver lower per-unit costs and potentially better outcomes through specialization. But if volume became spread too thin across too many competitors, the result could be higher unit costs, utilization that exceeded clinical need, and a continued drain of investment away from less profitable but essential services like emergency care and health information technology.

Safety Net Gains at Risk

Against this backdrop of market instability, one area had actually improved. Traditional safety net providers -- public hospitals, community health centers, and free clinics -- had grown stronger and more financially stable over the preceding years. Public health insurance expansions, including Medicaid and the State Children's Health Insurance Program (SCHIP), had converted many previously uninsured patients into covered ones, freeing up resources for these organizations to serve additional uninsured people. Federal grants and targeted funding had bolstered capacity.

But state budget crises threatened to reverse these gains. Health care represented the second-largest expense for most states after education, and the recent eligibility expansions had increased its share of state budgets. States were cutting back on outreach, freezing enrollment, and in some cases dropping newly eligible populations. While direct safety net funding remained largely intact at the time of the HSC visits, many states were considering deeper Medicaid and SCHIP cuts in their upcoming budgets.

Growing Skepticism About Market Solutions

Perhaps the most striking finding from HSC's fourth round of site visits was the depth of skepticism that had developed among health care executives, employers, and state and local policymakers about market-led approaches to controlling costs. The backlash against managed care had demonstrated the political and practical limits of administrative cost control. Now, with providers largely unchecked by countervailing pressure from plans, purchasers, or regulators, competition among hospitals and physicians was driving investment into specialized facilities and equipment in ways that threatened to increase costs and worsen existing capacity problems.

Employers felt largely powerless beyond passing costs to workers. Higher cost sharing might reduce some inappropriate utilization, but it could also lead people to delay needed care. And there were natural limits to how much cost employers could push onto employees before coverage became unaffordable altogether, potentially swelling the ranks of the uninsured.

Some stakeholders still believed in the vision of managed care and integrated delivery, arguing that the lessons of the 1990s could be applied more effectively. But many more had concluded that health care organizations were responding to immediate financial pressures -- investor returns, revenue generation, institutional survival -- in ways fundamentally at odds with the broader goals of controlling spending and protecting access to high-quality care. The HSC researchers noted that this growing disillusionment did not yet point toward any clear alternative, leaving the health care system in a kind of strategic limbo.

Sources and Further Reading

CMS — National Health Expenditure Data — Official data on U.S. health spending trends.

Kaiser Family Foundation — Health Costs — Analysis of health care costs and spending.

Health Affairs — Peer-reviewed health policy research.

Robert Wood Johnson Foundation — Health policy research and programs.

Commonwealth Fund — Research on health care costs and system performance.