Tracking Health Care Costs: Trends Turn Downward in 2003

Health care cost trends turned downward in 2003, marking a deceleration from the rapid spending growth that had characterized the previous several years, according to an analysis by the Center for Studying Health System Change (HSC). While overall health spending continued to rise, the rate of growth slowed notably across several major categories, offering some relief to employers and consumers who had endured years of double-digit premium increases and escalating out-of-pocket costs.

Cost Growth Decelerates

After several years of accelerating growth, health care spending growth moderated in 2003. Several factors contributed to the deceleration. Prescription drug spending growth slowed as fewer blockbuster drugs launched, more patents expired, and pharmacy benefit managers and health plans adopted more aggressive formulary management. Hospital spending growth also moderated, though hospital prices continued rising at rates well above general inflation.

Increased patient cost sharing likely played a role in dampening utilization. As employers raised deductibles and copayments, some patients reduced their use of health services -- particularly discretionary care and brand-name prescriptions. While this reduced spending in the short term, health policy experts cautioned that reduced utilization of necessary care, particularly preventive services and chronic disease management, could lead to higher costs in the future.

Structural Cost Drivers Persist

Despite the welcome deceleration, the fundamental factors driving health care cost growth remained largely unchanged. Provider consolidation continued to strengthen hospitals' and physicians' bargaining leverage over health plans, supporting above-inflation price increases. The diffusion of new medical technology -- including advanced imaging, minimally invasive surgical techniques, and biological pharmaceuticals -- added to spending as these innovations were adopted broadly. An aging population with growing chronic disease burdens created structural demand pressures that would only intensify over time.

The moderating trend was also partly cyclical. Health care spending growth had historically fluctuated in response to economic conditions, insurance market dynamics, and the timing of major pharmaceutical launches. Past periods of deceleration had been followed by renewed acceleration, and many analysts expected a similar pattern to repeat. The absence of structural reforms addressing the underlying cost drivers meant that the respite was likely temporary rather than a sign of lasting change.

For employers and policymakers, the deceleration provided a window of opportunity to pursue more fundamental reforms -- including payment model changes, transparency initiatives, and delivery system innovations -- that could produce sustained moderation in health care cost growth. Whether that opportunity would be seized or squandered remained an open question.

Sources and Further Reading

HSC analysis of health care cost trends based on national spending data, employer surveys, and Community Tracking Study research.