Providing Insights that Contribute to Better

Health Policy

Ten Things To Know Ten Things To Know About Health Care About Health Care Cost TrendsCost Trends

Bradley Strunk

Presented to MCOL’s HealthWebSummit “New Directions in Managing Health Care Costs”

The Center for Studying The Center for Studying Health System Change (HSC)Health System Change (HSC)

Independent, nonpartisan research on changes in the organization and delivery of care – and their impact on people Funded exclusively by The Robert Wood Johnson Foundation

Primary research effort: Community Tracking Study (CTS)

Also conduct a health care cost tracking analysis annually Synthesize public and private data series Integrate findings from CTS site visits

Basis of This PresentationBasis of This Presentation

Health Affairs “Web-exclusive” article on latest cost trends (available free of charge): http://www.healthaffairs.org/WebExclusives/Strunk_Web_Excl_092502.htm

HSC Data Bulletin on latest cost trends (essentially, an executive summary of web-exclusive article; also free): http://www.hschange.org/CONTENT/472/

For general information about HSC, visit our website at www.hschange.org

Definition of “Cost”Definition of “Cost”

Focus of this presentation is on health care costs that underlie private health insurance premiums – in other words, the expenditures that are incurred when someone uses the health care system; in this respect, health care costs can also be referred to as “claims” costs or “service use” costs

Term “spending” used interchangeably with “cost”

Health care cost/spending trends based on the Milliman USA Health Cost Index ($0 deductible) See http://www.healthcostindex.com/

1.1. Health Care Spending is Rising Health Care Spending is Rising Very RapidlyVery Rapidly

Per capita spending up 10% in 2001 Much larger than 1.4% increase in per capita

GDP

Someone will be paying for this

2001 Increase Was Largest in Over a 2001 Increase Was Largest in Over a DecadeDecade

0%

2%

4%

6%

8%

10%

12%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

An

nu

al %

Ch

an

ge

Pe

r C

ap

ita

Health care spending

Source: Milliman USA Health Cost Index ($0 deductible)

2.2. Increase in Spending On Increase in Spending On Hospital Hospital CareCare Increasingly Important to Increasingly Important to Overall Cost Trend in ‘01Overall Cost Trend in ‘01

-5%

0%

5%

10%

15%

20%

1997 1998 1999 2000 2001

An

nu

al %

Ch

ang

e P

er C

apit

a

Prescription DrugsHospital OutpatientAll ServicesPhysician CareHospital Inpatient 16.3

13.8

10.0

7.1

6.7

Source: Milliman USA Health Cost Index ($0 deductible)

Share of Overall Cost Trend Share of Overall Cost Trend Accounted for by Each CategoryAccounted for by Each Category

31% 32% 37%

5% 7%

14%30%

34%

28%

34%27% 21%

0%

20%

40%

60%

80%

100%

1999 2000 2001

Prescription Drugs

Physician Care

Hospital Inpatient

Hospital Outpatient

Source: Milliman USA Health Cost Index ($0 deductible)

3.3. Rising Hospital Spending Reflects Rising Hospital Spending Reflects Steeper Increases in Both Prices Paid Steeper Increases in Both Prices Paid to Hospitals to Hospitals andand Use of Services Use of Services

Prices rising for hospitals Steeply rising hourly wages for hospital personnel Hospitals have more leverage with health plans

Due to hospital consolidation And consumers demanding broader networks

Rising use of services even more important Service use up 8% in 2001

Reversal of trend on admission rate Rising use of outpatient services

Trends in Hospital Price and QuantityTrends in Hospital Price and Quantity

3.63.32.5

1.91.71.8

3.74.0

-2.2-2.8

-1.2-0.4

1.5

3.23.6

8.0

-3%-2%-1%0%1%2%3%4%5%6%7%8%

1994 1995 1996 1997 1998 1999 2000 2001

An

nu

al %

Ch

ang

e

Hospital Price Index

Hospital Quantity Index

Source: Hospital Price Index: U.S. Department of Commerce, Bureau of Labor Statistics’ PPI for Hospital Services; Hospital Quantity Index: calculated as the residual of the Milliman USA hospital spending trend and the trend in the PPI for Hospital Services.Note: the PPI for Hospital Services is for non-public payors and for general medical and surgical hospitals only.

4.4. Key Short-term Cost Driver: Retreat Key Short-term Cost Driver: Retreat From Tightly Managed CareFrom Tightly Managed Care

Easier access to specialists

Fewer prior authorization requirements

Less provider risk contracting, or “capitation”

Broader provider networks

5.5. Aging Plays Limited Role in Health Aging Plays Limited Role in Health Care Cost TrendsCare Cost Trends

Early 1990s: Aging’s effect is negligible

By 2001: Aging accounted for less than 10% of cost trend

Rest of this decade: Aging will remain a limited cost driver

Effect of U.S. Population Aging on Health Care CostsEffect of U.S. Population Aging on Health Care Costs(Annual Percentage Change)(Annual Percentage Change)

5.85.96.56.7

8.1

5.5

4.04.9

9.3

0.5 0.590.690.650.730.640.270.070.09

0%

2%

4%

6%

8%

10%

1991 1993 1995 1998 2001 2003 2005 2008 2010

An

nu

al %

ch

an

ge

Per Capita Non-Medicare Personal Health Care ExpendituresAging Index

Sources: Aging Index—calculated using data from the 1996 and 1997 MEPS and U.S. resident population estimates and projections of the under-65 population from the U.S. Census Bureau; Per Capita Non-Medicare Personal Health Care Expenditures—from the National Health Accounts, maintained by the Centers for Medicare and Medicaid Services.

Actual Estimates Projections

6.6. General Economy Influences General Economy Influences Health Care Cost TrendsHealth Care Cost Trends

Recent research: five year lag

Mechanism uncertain Employer strategies important

During recessions, high cost trends driven by previous booms

7.7. Advancing Medical Technology is Advancing Medical Technology is the Dominant Long-term Driver of the Dominant Long-term Driver of Cost TrendsCost Trends

Prominent studies: accounts for ½ to of long-term trend in excess of general inflation New procedures

New applications of old procedures

Many innovations that reduce unit costs generate increased volume

Ready acceptance is a key factor Public expects new cures

Extensive third-party payment precludes costs from restraining technology

8.8. Premium Trend is Higher Now Premium Trend is Higher Now Than Trend in Underlying CostsThan Trend in Underlying Costs

Premium increase for 2002: 12.7 percent

Health insurance “underwriting cycle” (UC) plays important role

Health insurer profits now up sharply

The UC will turn – but not yet

Source of premium data: Kaiser Family Foundation/Health Research and Educational Trust Employer Benefits Survey

9.9. Shift to More Patient Cost Sharing Shift to More Patient Cost Sharing Already UnderwayAlready Underway

Higher deductibles, coinsurance, copayments Cost of coverage increased 2-3% in excess of

premiums in 2002

Tiered provider networks

Consumer-driven plans

10.10. Potential for Some Slowing of the Potential for Some Slowing of the Overall Cost TrendOverall Cost Trend

Trend declined to 8.8% through first six months of 2002

Potential factors Increased patient cost sharing Completion of transition to looser managed care

CMS projects a slowdown in private personal health care expenditure growth in 2003

ConclusionsConclusions

Mid-1990s was a temporary hiatus from cost pressures

Financing system will force attention to the issue

Emphasis now on patient financial incentives

Approach vulnerable to backlash

Lack of alternatives will limit response