Tracking Health Care Costs: Growth Remains Stable at High Rates

Health Care Spending Growth Held Steady at Elevated Levels Through the Mid-2000s

Between 2001 and 2005, Americans covered by private health insurance experienced annual spending increases that consistently hovered near 7 to 8 percent -- well above the pace of overall economic growth. According to a Center for Studying Health System Change (HSC) Data Bulletin (No. 33, October 2006), authored by Paul B. Ginsburg, Bradley C. Strunk, Michelle I. Banker, and John P. Cookson, per-person health care expenditures for the privately insured rose 7.4 percent in 2005. That marked the third consecutive year the cost trend fell just under 8 percent, following a peak of 10.4 percent in 2001. Preliminary figures from the first quarter of 2006 pointed to a 7.7 percent uptick, suggesting the plateau was persisting rather than breaking.

The stubborn gap between health spending growth and broader economic expansion was a central concern. Even with U.S. per-capita gross domestic product climbing a healthy 5.4 percent in 2005, medical costs still outstripped it by roughly two percentage points. That differential, compounding year after year, was eroding affordability for employers, workers, and families alike.

What Was Driving the Numbers

The HSC analysis, drawing on Milliman Health Cost Index data, broke spending into five service categories. Three of them -- inpatient hospital care, physician services, and a catch-all "other services" bucket that included home health and ambulance -- actually accelerated in 2005. Only two categories slowed: outpatient hospital spending dipped slightly, and prescription drug expenditures continued a multi-year deceleration.

Prescription drugs were a noteworthy bright spot relative to earlier years. Per-person drug spending grew 4.8 percent in 2005, marking the sixth straight year of slower growth and a dramatic comedown from the 18.4 percent spike recorded in 1999. Lower utilization growth, rather than price changes, was the primary explanation. However, early 2006 data already hinted the slowdown might be reversing, with drug spending ticking back up to 7.2 percent.

Hospital inpatient spending jumped to 7.1 percent growth in 2005, up from 5.3 percent the prior year. Meanwhile, outpatient hospital spending -- a category that also captured freestanding surgery centers and imaging facilities -- posted a 10.4 percent increase, the fastest-growing segment despite a modest easing from 11.2 percent in 2004. Physician spending rose 7.1 percent, driven mainly by greater utilization of services rather than fee increases. The "other services" category surged 12 percent, propelled largely by home health care and ambulance expenditures.

The Premium Puzzle: Why Employers Saw Temporary Relief

Despite underlying cost trends remaining elevated, employer-sponsored health insurance premiums actually showed a decelerating pattern in 2005 and 2006. Average premiums climbed 7.7 percent in 2006, down from 9.2 percent the year before, according to Kaiser Family Foundation / Health Research and Educational Trust survey data. This seeming disconnect had a straightforward explanation: the lagged relationship between underlying medical costs and the premiums built on top of them, combined with a deliberate shift in benefit design.

For five consecutive years through 2006, employers had been ratcheting up cost sharing -- higher deductibles, larger copayments, increased coinsurance -- transferring a growing slice of expenses onto employees. This strategy, sometimes called "benefit buy-down," masked the true underlying trend. Without it, premium increases would have been noticeably higher. The authors cautioned that premium growth could not stay below the underlying cost trend indefinitely without benefits continuing to shrink, and that major relief from the financial burden of fast-rising premiums was unlikely in the years ahead.

Utilization, Prices, and the Hospital Picture

An important shift occurred in the hospital sector during 2005. After several years in which price increases drove most of the spending growth while volume stayed relatively flat, the pattern partially reversed. Combined inpatient and outpatient hospital utilization jumped 4.5 percent -- a sharp swing from the 1.3 percent increase recorded in 2004 -- while hospital price growth cooled significantly, dropping to 4.3 percent from 7.1 percent. This meant that more people were getting more hospital services, even as the per-unit price increases moderated.

The rapid expansion of specialty facilities -- new inpatient wings, outpatient centers, freestanding surgical and imaging operations, and ancillary service capabilities added to physician offices -- was feeding this volume growth. The combination of new supply generating its own demand and increasing physician self-referral to owned facilities raised concerns that capacity expansion would continue pushing spending upward regardless of per-unit pricing trends.

Forces Pulling in Both Directions

Looking ahead from 2006, the HSC researchers identified competing pressures. On the side of higher costs, advancing medical technology remained what they called the "wild card" -- its short-term contribution to spending growth was impossible to measure or predict. The continuing rise of obesity in the American population was another significant cost driver. Research by Kenneth Thorpe and colleagues estimated that 27 percent of real per-capita spending growth between 1987 and 2001 was attributable to increasing obesity rates and the higher per-person spending associated with obese patients.

Two factors had potential to pull trends lower. First, several blockbuster pharmaceuticals had recently lost or were about to lose patent protection -- Zocor had already gone generic, and Zoloft was on the horizon -- opening the door to cheaper alternatives. Second, the acceleration of patient cost sharing was expected to dampen demand, particularly if financial incentives could be designed to steer patients toward lower-cost providers or treatment alternatives.

Policy Aspirations Versus Likely Outcomes

The authors noted a gap between what policy circles were discussing and what the data actually supported. Political leaders of the era pointed to health information technology as a money-saving solution through better care quality and reduced duplicative testing. Medical liability reform was touted as a way to curb defensive medicine. Pay-for-performance programs and greater price transparency were promoted as paths to lower prices. While some of these ideas held genuine promise, the HSC team noted that none had demonstrated the scale of impact needed to bend the cost curve in the near term.

The bottom line from the bulletin was sobering: the most probable scenario for the next several years involved health costs continuing to outpace household incomes, private insurance becoming progressively less affordable, and more Americans finding themselves priced out of adequate coverage. The stability of the cost trend at around 7 to 8 percent was not stability in any reassuring sense -- it was a sustained rate of increase that, year after year, widened the gap between what health care cost and what ordinary households could manage.

Data and Methodology

This HSC Data Bulletin drew on the Milliman Health Cost Index 2005 Series (based on a zero-deductible benefit design) to measure private-insurer claims trends. Hospital and physician price trends were tracked using Bureau of Labor Statistics Producer Price Indexes for general medical/surgical hospitals and physicians' offices. Prescription drug price data came from the BLS Consumer Price Index. Premium trend data were sourced from the Kaiser Family Foundation / Health Research and Educational Trust 2006 Survey of Employer Health Benefits. The analysis was adapted from a companion Health Affairs article (web-exclusive, October 3, 2006) by the same research team.

Sources and Further Reading

Health Affairs -- Tracking Health Care Costs: Continued Stability But at High Rates in 2005 -- The companion peer-reviewed article by Ginsburg, Strunk, Banker, and Cookson.

CMS -- National Health Expenditure Data -- Official data on U.S. health spending trends.

Kaiser Family Foundation -- Health Costs -- Analysis of health care costs, premiums, and employer benefits.

Robert Wood Johnson Foundation -- Health policy research and programs.

Commonwealth Fund -- Research on health care costs and system performance.