Tracking Health Care Costs:

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: A Slowing Down of the Rate of Increase

Issue Brief No. 06 | January 1997

Throughout the 1990s, health care cost increases slowed dramatically. Virtually every study pointed to a substantial decline in the rate of growth even after accounting for general inflation, which itself fell from 4.3 percent in 1990 to 2.5 percent in 1995. The pressures to hold health care costs down were so intense that the low rates of increase looked like they could continue for some time. Consumers, however, did not necessarily perceive this change -- perhaps because costs were being shifted to them. This Issue Brief tracked changes in health care costs over time, as part of the Center for Studying Health System Change's plan to monitor these trends periodically.

A Lower Rate of Increase

Looking at a key indicator -- the national health expenditures published by the Health Care Financing Administration (HCFA) -- health care costs increased just 5.4 percent in 1994, a meaningful cooling-off from the 11.0 percent peak in 1990.

The trend was even more pronounced in data from the actuarial firm Milliman & Robertson. Their Health Cost Index, derived from provider survey data on the major components of health spending (hospitals, physicians, and prescription drugs), showed per capita spending growth of 10.9 percent in 1990 dropping to just 3.2 percent by 1995. This decline in the growth rate was not limited to any single area -- it showed up in each of the three major components of health spending according to HCFA data.

Employer surveys showed the steepest declines of all. A Hay-Huggins survey of employer-sponsored health plans found just a 1.2 percent increase in premiums per enrollee in 1995, compared with an 11.8 percent increase in 1992.

While employer surveys aligned generally with national indicators, there were meaningful regional differences. KPMG Peat Marwick data documented notably lower cost increases in the West than in other regions. This might be attributable to the West's more extensive and mature managed care systems and a higher degree of market competition, though further research was needed to test that hypothesis.

Variations were also evident across industries and by firm size. KPMG Peat Marwick data showed that while premiums increased at an annual rate of 6.4 percent across all industries between 1991 and 1995, the service industry had the lowest rate of increase (5.8 percent) and financial firms had the highest (6.7 percent). Premium increases were smaller in firms with 5,000 or more employees than in those with fewer than 1,000 employees. Between 1991 and 1995, larger firms saw their premiums increase 6.2 percent annually while smaller firms experienced a 6.8 percent increase. These differences likely reflected the tendency of larger firms to be more aggressive purchasers of health care services.

A Slow-Down for All Types of Health Plans

One of the more puzzling findings was that the decline in premium growth hit fee-for-service plans almost as hard as managed care plans. According to the Hay-Huggins survey, the annual percentage change in premiums per enrollee by plan type between 1992 and 1995 was: fee-for-service at 5.0 percent, HMOs at 4.8 percent, PPOs at 5.1 percent, and point-of-service plans at 3.3 percent. Across all plan types, the average was 4.2 percent.

Although fee-for-service plans and HMOs were only 0.2 percentage points apart, the gap could widen when changes in benefit structure were taken into account. A Hay-Huggins actuarial analysis performed for the Center for Studying Health System Change indicated a relatively stable benefit structure for fee-for-service plans but a slowly expanding one for HMOs. When these differences were factored in, HMOs showed a lower rate of premium increase.

Several factors were cited as explanations for the drop in premium growth among managed care plans: steeper price discounts negotiated with providers, lower hospital admission rates and shorter lengths of stay, and other changes in clinical practice. But these factors did not apply as readily to fee-for-service plans. Why fee-for-service premiums had fallen nearly as much remained a matter of speculation. Possible explanations included a spillover of more cost-effective practice patterns from managed care to fee-for-service -- for example, when physicians who changed their practice in response to disease management protocols applied those changes to all patients. Managed care techniques like preadmission certification, length-of-stay review, and high-cost case management were also becoming common features of traditional plans. Additionally, Medicare payment rates to hospitals and doctors had increased faster than costs in recent years, which may have slowed the rate at which providers raised charges to private patients -- a reverse cost shift.

Consumers Don't Get It

With so many indicators pointing to slowing health care cost increases, it might have surprised health policy makers to learn that consumers did not share this view. They consistently reported that their costs were rising and expressed mostly negative views about anything related to health care costs.

According to a Louis A. Harris and Associates survey conducted for the Center for Studying Health System Change's Community Snapshots Project, 64 percent of the 5,111 respondents reported that their out-of-pocket costs had increased over the past three years, and 26 percent said their family health care costs were somewhat or completely out of control. Nearly 9 out of 10 respondents expected their out-of-pocket costs to rise further.

Were consumers' perceptions out of step with reality, or had they benefited less from the cost slowdown than others? Some indicators suggested the latter was at least partially true. The underwriting cycle, for example, caused the slowdown in premium growth to lag behind the actual slowing of health care costs in the early 1990s, meaning consumers paying premiums had experienced the trend for fewer years.

Employees were also shouldering an increasingly large share of premiums. Between 1992 and 1995, employees' share of the total health insurance premium rose from 23.6 percent to 28.9 percent. The 5.0 percent average annual increase in total premium cost over that period translated to a 12.3 percent per year increase in what employees paid. Those with family coverage saw an even steeper rise.

With so many people moving into managed care plans, consumer perceptions were also likely influenced by the nature of their managed care experience. Those comfortable with the provider network and getting most of their care through it would have noticed reductions in deductibles and coinsurance, and were more likely to feel their costs had stabilized. But those who frequently used out-of-network providers were more likely to perceive increasing costs.

What Lies Ahead?

The first 1996 employer survey -- KPMG Peat Marwick's survey released in October -- reported that health insurance premiums increased just 0.5 percent from spring 1995 to spring 1996, the lowest increase on record for this survey, down from 2.1 percent for 1995. For the second consecutive year, premiums had increased less than overall inflation.

Given the trends of the decade, would these low rates of increase hold? If they rose, would they soar back to the double digits of the 1980s or would they remain well below historical levels? Research on cost trends by Milliman & Robertson, based on the strong economy of recent years, suggested an upturn was possible. But health care markets had changed so much that competitive pressures to contain costs could lead to continued very small increases. If that happened, consumers might finally start to feel better about costs -- but only if the trend of employers shifting costs to employees began to level off.

This Issue Brief is adapted from "Tracking Health Care Costs" by Paul B. Ginsburg and Jeremy D. Pickreign, which appeared in the Fall 1996 issue of Health Affairs. For more information about the Harris consumer survey, see "Tracking Consumers' Reactions to the Changing Health Care System: Early Indicators" by James R. Knickman et al. in the Summer 1996 issue of Health Affairs.

Sources and Further Reading

Ginsburg, P. B. and Pickreign, J. D. "Tracking Health Care Costs." Health Affairs, Fall 1996. Knickman, J. R. et al. "Tracking Consumers' Reactions to the Changing Health Care System: Early Indicators." Health Affairs, Summer 1996.