Wall Street Comes to Washington

Originally published by the Center for Studying Health System Change (HSC) as Issue Brief No. 87, August 2004.

Wall Street Roundtable: Health Care Cost Slowdown and Market Outlook

While health care cost growth was likely to continue slowing through the end of 2004, the longer-term outlook for a sustained slowdown in underlying costs and private health insurance premiums depended largely on the strength of the economy, according to market and health policy experts at HSC's ninth annual Wall Street roundtable. Even as cost growth moderated, insurers were maintaining pricing discipline by keeping premium increases ahead of cost trends to preserve profitability.

Gary Taylor, principal of equity research at Banc of America Securities, predicted that cost trends would continue to moderate through 2004 but could rebound in 2005 and 2006. The key variable was employment: if the job market tightened, employers might ease pressure on cost containment as they competed for workers, potentially reigniting faster spending growth.

Employers Shifting Costs to Workers

Employers were expected to keep transferring health care costs to workers through higher deductibles, copayments, and coinsurance, though an improving economy could temper this trend as labor markets tightened. Employers remained skeptical of newer health insurance products, including tiered-provider networks and consumer-driven health plans, viewing them as unproven and potentially disruptive.

Growth in hospital use had slowed, but the hospital industry remained in the midst of a building boom, raising questions about whether excess capacity could eventually drive up costs. Increased payments to managed care plans under the Medicare Modernization Act could reinvigorate private plan participation in Medicare, but worries about the federal budget deficit might lead Congress to roll back rate increases.

Insurer Pricing Discipline and Market Dynamics

The roundtable revealed a striking dynamic in the health insurance market: even as underlying cost growth slowed, insurers were deliberately maintaining premium increases above the rate of cost growth to rebuild margins after years of underpricing during the managed care era. This pricing discipline reflected lessons learned from the insurance cycle of the late 1990s, when aggressive competition for market share had led to inadequate premiums and financial losses.

Robert Reischauer of The Urban Institute noted that the broader economic environment, including tighter labor markets, higher inflation, and rising interest rates, would likely feed into the health marketplace in ways that were difficult to predict. HSC President Paul B. Ginsburg observed that general economic performance was a predictor of health care cost trends but operated with a lag of three to four years, complicating efforts to forecast future spending patterns.

Sources and Further Reading

Center for Studying Health System Change, "Wall Street Comes to Washington," Issue Brief No. 87 (August 2004).