Despite Fears, Costs Rise Only Modestly in 1998

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.

Data Bulletin No. 13 | Fall 1998

The widely anticipated surge in health care costs had not yet materialized as of late 1998. Drawing on the most current data available, Health System Change (HSC) found only a small uptick in the rate of cost increases. For three consecutive years, HSC had reviewed a broad array of data sources to track cost trends and help interpret them for public and private decision makers.

Cost Increases Remain Modest

One of the key proxies for health care costs was revenue received by hospitals, physicians, and other providers on a per capita basis. According to Milliman and Robertson's Health Cost Index, which excluded revenues from Medicare patients, these trends had declined steeply in the early 1990s, bottoming out at 2.0 percent growth in 1994. Growth rates had risen since then, but the increases were modest -- 3.3 percent in the most recent year, up from 2.1 percent in 1996.

Prescription drugs continued to be the fastest-growing component of health care costs, with double-digit increases since 1995. Most of this growth reflected increases in the volume of drugs used rather than price hikes. Drug expenditures climbed 11.5 percent in 1997, while the drug component of the Consumer Price Index rose only 2.5 percent. By comparison, hospital and physician spending increased at much lower rates of 2.4 percent and 2.0 percent, respectively.

Regional differences in health care cost growth were apparent, with the highest increases in the South and the lowest in the West. These differences presumably related to the extent or pace of managed care growth in a given region, though analyzing these relationships was not straightforward.

Bureau of Labor Statistics data on payroll in health services establishments served as another useful indicator of cost trends because it provided the most timely information available. The increase in payroll expense per capita was 5.3 percent for the first half of 1998 compared with the same period in 1997. The increase between 1996 and 1997 had been 5.9 percent. These numbers ran counter to the notion that cost growth was accelerating.

Insurance Premiums

Premiums for employment-based health insurance increased just 3.3 percent in 1998. While this was higher than the 2.1 percent rise in 1997, it fell far short of the 5 to 7 percent increases that industry experts had predicted and that had been reported in news coverage. Premium increases were relatively consistent across health plan types, ranging from 2.9 percent for HMOs and point-of-service (POS) plans to 3.8 percent for preferred provider organizations (PPOs).

Between 1992 and 1994, premium increases had exceeded underlying cost increases by a substantial margin. This pattern started to reverse in 1995, and in 1996 and 1997, premium increases lagged behind the key cost proxy -- provider revenues. Some analysts had expected 1998 premium trends to exceed provider revenue trends, but with premiums in 1998 increasing no more than the 1997 provider revenue figure, this did not appear to be happening.

Impact on Consumers

The sustained period of low cost increases was delivering tangible benefits to consumers. Earlier in the 1990s, as premium growth rates fell, the proportion of premiums paid by employees rose substantially. That trend leveled off in 1995 and 1996, and employee contributions had actually declined since then. Possible factors included a delayed reaction by employers to the slowdown in premium growth and tightening labor markets that made employers less willing to shift costs to workers.

Another positive sign for consumers was that out-of-pocket spending for medical services was down substantially -- 9 percent lower in 1995 than in 1990, according to the most recent data from the Department of Labor's Consumer Expenditure Survey. This decline was likely driven by the rapid shift from conventional coverage to managed care plans, where patient cost-sharing was much lower.

Looking Ahead

Premium increases could well be higher the following year as insurers, facing thin profit margins, became less aggressive in holding prices down to expand market share. But over the longer term, the underlying cost of health care would remain the dominant influence on the direction of premium trends. Factors that could push increases higher included the effects of the managed care backlash (such as looser utilization controls) and further provider consolidation. Working against those pressures were the continuing excess capacity among health providers and the single-minded determination of purchasers to keep their costs down.

This Data Bulletin is adapted from "Tracking Health Care Costs: What's New In 1998?," by Paul B. Ginsburg and Jon R. Gabel, which appeared in the September/October 1998 issue of Health Affairs.

Sources and Further Reading

Ginsburg, P. B. and Gabel, J. R. "Tracking Health Care Costs: What's New In 1998?" Health Affairs, September/October 1998. Center for Studying Health System Change, Data Bulletin No. 13, Fall 1998.