Tracking Health Care Costs

Originally published as Data Bulletin No. 25 by the Center for Studying Health System Change (HSC), 2003. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Tracking Health Care Costs: Trends Stabilize but Remain High in 2002

Health care spending per privately insured American jumped 9.6 percent in 2002, a rate nearly four times faster than overall economic growth. While the figure remained extremely high, it marked the first deceleration in five years, edging down slightly from the 10 percent increase recorded in 2001. The moderation in spending growth reflected slowing trends in several key cost categories, though prescription drug spending and hospital outpatient costs continued to climb at rates well above the overall average.

Spending Growth by Category

Prescription drugs remained the fastest-growing spending category, though the pace of increase had begun to ease compared with the extraordinary growth rates seen in the late 1990s. Hospital inpatient spending reversed its long period of decline and showed positive growth, partly reflecting the end of aggressive managed care utilization controls and partly reflecting higher prices as hospitals gained bargaining leverage through consolidation. Hospital outpatient spending continued its decade-long pattern of consistently high growth, fueled by the shift of procedures from inpatient to outpatient settings and by the expansion of diagnostic imaging and other technology-intensive services. Physician spending growth remained moderate, though pressure from both practice costs and insurer reimbursement rates was building.

Forces Behind the Cost Trajectory

Several factors were driving the sustained high level of spending growth. The managed care backlash of the late 1990s had led health plans to loosen utilization controls, giving patients broader access to specialists, more generous drug formularies, and fewer prior authorization requirements. Provider consolidation -- both among hospitals and in the growing trend toward hospital acquisition of physician practices -- was shifting bargaining power from health plans to providers, enabling higher price increases. New medical technologies, including expensive biologic drugs and advanced imaging equipment, added to per-capita costs. At the same time, the weak economy limited employers' ability to absorb premium increases, leading to growing cost shifting to employees through higher deductibles, copayments, and premium contributions.

Implications for Employers and Consumers

The continued high rate of spending growth was translating directly into premium increases that strained employer budgets and household finances. Employers responded with a range of cost-management strategies, including higher cost-sharing requirements, greater reliance on pharmacy benefit managers to control drug spending, and early experiments with consumer-directed health plans that combined high-deductible coverage with health savings accounts. For workers, the cumulative effect of several years of above-inflation premium growth was a measurable reduction in the value of total compensation, as a growing share of employer spending went to health benefits rather than wages. Low-wage workers and those employed by small firms bore a disproportionate burden, since they were more likely to face high cost-sharing and less likely to receive employer contributions large enough to offset premium growth.

Sources and Further Reading

This Data Bulletin drew on data from the Milliman Health Cost Index, which tracks cost increases faced by private insurers, and the Kaiser Family Foundation/Health Research and Education Trust annual survey of employer health benefits. The analysis was published by the Center for Studying Health System Change with support from the Robert Wood Johnson Foundation.