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44% of Health Care Cost Increase Attributable to Pharmaceutical Spending

News Releases
November 13, 2000

FURTHER INFORMATION, CONTACT:
Alwyn Cassil: 202/264-3484

ASHINGTON, DC - Nearly half of health care cost increases in 1999 were due to increased prescription drug spending, according to a new study from the Center for Studying Health System Change (HSC) published this month in Health Affairs. Overall, health care costs rose 6.6 percent in 1999, up from an average increase of 2.4 percent per year from 1993 to 1997.

"Although much of the focus on controlling health care costs over the last several years has been about managing inpatient hospital and specialist care, these findings suggest an increasing role for cost-cutting approaches that keep drug spending in check, such as the three tier pharmacy benefit strategies and the categorization of some pharmaceuticals as ’lifestyle’ drugs," said Paul B. Ginsburg, study co-author and HSC president.

Though the 1999 health care cost increases are substantial, they follow a pattern similar to prior years, with sharply higher spending for drugs and hospital outpatient services, but smaller changes in hospital inpatient spending. In 1999, the breakdown for cost increases was as follows:

  • 44 percent were associated with drug costs, with one-third of this increase due to higher drug prices and the rest due to new drugs and increases in the use of existing drugs.
  • 32 percent - physician fees.
  • 21 percent - hospital outpatient spending.
  • 3 percent - hospital inpatient costs.

The study also points out that the period of health insurance premiums increasing at low rates is over, and inflation is back. Premiums increased 8.3 percent in 2000, compared to the average per-year increases of 2 percent between 1994 and 1998. This sharp increase signifies the return of premium increases exceeding underlying cost increases and a turn in the insurance underwriting cycle. In the early 1990s, there was low growth in underlying spending which allowed insurers to cut premium increases in order to gain market share and attract new customers. The turn in the insurance cycle means that now insurers are willing to sacrifice market share to restore profitability.

One consequence of premium increases being steeper than cost increases is the incentive for employers to self-insure. With a 9.6 percent increase in premiums for fully insured plans and only a 7.1 percent rise for self-insured plans in 2000, this has contributed to the proportion of employees enrolled in self-insured plans increasing from 48 to 51 percent between 1999 to 2000. Self insured products are covered by ERISA and therefore are not subject to state regulations such as patient protections, making state level insurance reform more challenging.

"Judging from past cycles, this phase in which premium increases exceed increases in underlying costs will probably continue for at least another two years. And premium increases for 2001 and 2002 are likely to be high," said Ginsburg. "But the bright side for consumers and purchasers is that because the health care marketplace is now so competitive, I don’t expect to see double-digit cost and premium increases like we did in the late 1980s and early 1990s."

The HSC study, titled "Tracking Health Care Costs: Inflation is Back," uses cost data from the Milliman & Robertson Health Cost Index database, which measures health care costs by reviewing the changes in health care provider revenues, as well as a number of series from the Department of Labor.

Data on insurance premiums comes from the Kaiser Family Foundation/Hospital Research and Educational Trust Survey of Employer-Sponsored Health Benefits for 1998-2000 and the KPMG survey of employer-based health plans for 1993-1998. The Kaiser/HRET survey included 1,887 private and public firms with three or more workers. The 8.3 percent increase is substantially higher than the 4.8 percent rate of premium growth in 1999.

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