Tracking Health Care Costs: Trends Slow in First Half of 2003

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Tracking Health Care Costs: Trends Slow in First Half of 2003

Data Bulletin No. 26 — December 2003

Bradley C. Strunk, Paul B. Ginsburg

After several years of rapid acceleration, the growth rate of health care spending for privately insured Americans showed signs of moderating in the first half of 2003. Per capita health care spending rose 8.5 percent during this period, a meaningful decline from the 10 percent increase recorded in the second half of 2002. While the cost trend remained well above the rate of GDP growth, the 1.5 percentage-point drop represented the largest single deceleration since the early 1990s.

The slowdown was broad-based, touching all four major categories of health care spending: inpatient hospital services, outpatient care, prescription drugs, and physician services. This Data Bulletin by Bradley C. Strunk and Paul B. Ginsburg, drawing on the Milliman USA Health Cost Index, provided a detailed breakdown of where spending trends were heading and what was driving the changes.

Prescription Drug Spending Growth Drops Sharply

The most dramatic change occurred in prescription drug spending, which rose only 8.5 percent in the first half of 2003 — nearly 5 percentage points below the 13.4 percent increase in the second half of 2002. This was notable because it marked the first time since the mid-1990s that the drug spending trend had not grown at double-digit rates. The slowdown reflected a combination of factors: increased patient cost sharing for medications through tiered formulary copayments, generic substitution as major brand-name drugs lost patent protection, and a thinner pipeline of blockbuster new drugs reaching the market.

Hospital Spending: Prices Up, Utilization Down

Hospital spending trends presented a more complex picture. Inpatient spending grew 7.6 percent in the first half of 2003, down from 8.3 percent in the prior half-year period. Outpatient spending increased 12.9 percent, also down from 14.1 percent, though outpatient care remained the fastest-growing category. Physician services spending rose 6.1 percent and continued to be the slowest-growing component.

Beneath the overall hospital numbers, however, two trends were moving in opposite directions. Hospital prices were accelerating sharply, jumping 8.0 percent in the first half of 2003, up from 6.2 percent in the prior period and well above the modest 2 to 4 percent annual price increases that had characterized the late 1990s. HSC site visit research indicated that hospitals continued to hold strong negotiating leverage with health plans, enabling them to secure large payment rate increases. Meanwhile, hospital compensation costs, particularly for nurses, remained elevated. Hourly nursing compensation at private hospitals had surged 8.8 percent during 2002, driven by worker shortages.

At the same time, hospital utilization growth slowed markedly, falling to just 2.3 percent in the first half of 2003, down from 5 percent in the preceding period. The decline in utilization growth likely reflected the impact of increased patient cost sharing for hospital services and the winding down of the transition from tightly managed to more loosely managed care that had fueled utilization increases in earlier years.

Spending Data by Category, 1998–2003

The semiannual spending data from the Milliman USA Health Cost Index revealed the trajectory of cost trends over the preceding five years. Total per capita spending growth rose from 4.9 percent in the first half of 1998 to a peak of 10.3 percent in the second half of 2001 before declining to 8.5 percent by the first half of 2003. Inpatient hospital spending growth peaked at 10.3 percent in the first half of 2002 and had come down to 7.6 percent. Outpatient spending peaked at 15.3 percent in the first half of 2001. Prescription drug spending peaked at 19.5 percent in the second half of 1999 and had declined to 8.5 percent by the first half of 2003, reflecting the most dramatic deceleration of any spending category.

Outlook for Premiums and Coverage

The moderation in underlying cost trends was expected to bring an end, possibly in 2004, to the long period of accelerating employer-sponsored health insurance premiums. Premium increases had reached a 13-year peak of 13.9 percent in 2003. While the slowdown would provide some relief to private and public payers as well as consumers, the authors cautioned that cost and premium trends were still likely to remain well above GDP growth for the foreseeable future.

Increased patient cost sharing was probably an important factor in the slowing of cost trends, but few observers expected cost sharing alone to produce sustained cost reductions over the long term. Meanwhile, newer tools such as disease management programs and tiered provider networks had not yet demonstrated their cost-control potential in the marketplace. Without more effective measures to restrain spending growth, the rising cost of health insurance would continue to make coverage unaffordable for a growing number of Americans, pushing more people into the ranks of the uninsured.

Sources and Further Reading

AHRQ — Federal health care quality research agency.

Health Affairs — Peer-reviewed health policy research.

Robert Wood Johnson Foundation — Health policy research.

Commonwealth Fund — Research on health care quality.