Center for Studying Health System Change

Insatiable Demand for Health Care Will Drive Up Costs Until Consumers Feel Financial Pain

Weakening Economy Could Hasten Day of Reckoning as Medical Costs Spiral Again

News Releases
July 12, 2001

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ASHINGTON, D.C. - As health care costs surge again, most insured consumers are enjoying greater access to care, health plans are prospering and employers are wringing their hands about how to pay for it all, according to a panel of Wall Street and health policy analysts at a roundtable held today by the Center for Studying Health System Change (HSC).

In the wake of a booming economy and a tight labor market, health care cost-control efforts have taken a back seat to consumer demand for more freedom and choice, said Norman M. Fidel, a senior vice president at Alliance Capital Management.

"The backdrop right now is not toward cutting costs," he said. "It’s toward providing more care."

But consumers shouldn’t get too comfortable with the status quo, because declining corporate profits and increasing medical costs and insurance premiums will eventually force employers to shift more costs to workers, according to panelists at HSC’s sixth annual Wall Street Comes to Washington: Market Watchers and Policy Analysts Evaluate the Health Care System roundtable. HSC is a nonpartisan policy research organization funded solely by The Robert Wood Johnson Foundation.

An audio webcast of the roundtable is available at kaisernetwork.org, and a full transcript of the panelists’ comments will be available soon at www.hschange.org.

"Right now the plans and the employers are sort of helpless, but I don’t think that can continue very long in the face of underlying cost increases," said Robert Reischauer, Ph.D., president of The Urban Institute. "I think more of this burden is going to be pushed off onto the employee through various devices that try and hide the effect from the worker."

Currently, consumer expectations for health care are almost limitless, said Roberta Walter Goodman, a managing director at Merrill Lynch.

"If you look at what we expect out of our health care system, we think it should cover anything we need anytime we want it from whoever we want it with no delays. and we think that somebody else ought to be paying every last dime of the care, and that’s our basic problem," Goodman said.

While pharmaceutical costs have been a major driver of increasing medical costs, drug spending appears to be tapering off slightly because of drug patent expirations and increased consumer cost sharing, Fidel said. But inpatient hospital, physician and outpatient care costs are all increasing significantly.

"Now we have everything else accelerating - hospital costs are moving into the high-single digits from the low-single digits," Fidel said. "Physicians costs, which used to be flat to down, are now in the mid-single digits, and outpatient care is now the largest single incremental cost trend facing health plans."

Employers will have to respond because they can’t absorb 13 percent to 15 percent premium increases every year and remain competitive in today’s global marketplace, Fidel said, adding, "So, to me, the only solution is to put the costs on the consumer."

As increased cost sharing leads to greater inequalities in the type of care available to people, HSC President Paul B. Ginsburg, Ph.D., who moderated the panel, asked whether policy makers will intervene to shelter consumers from increased cost sharing.

Reischauer said it’s unlikely "policy makers would get involved in this fray if employers begin increasing cost sharing" because "policy makers have their hands full with Medicare, with Medicaid, with the patients’ bill of rights kinds of issues, and they’re going to stay as far away from this as possible."

The health care landscape has changed dramatically in the last five years, the panelists agreed, and providers, especially prominent hospital systems, have gained bargaining clout with health plans and are at each others’ throats.

"There’s an extraordinarily adversarial relationship going on right now that is not necessarily healthy for the industry, let alone the participants, but the reality is the environment that this industry is functioning in, it’s eat or be eaten," said Dennis Farrell, a managing director at Moody’s Investor Services who follows not-for-profit hospitals.

Goodman predicted that more health plans will move away from restrictive care management practices such as preauthorization for care and instead invest in information technology that will let them analyze physician and hospital practice patterns.

Research shows that there are "substantial gaps between what is done in the marketplace by practicing physicians and what we know from evidence-based medicine to be more appropriate . and to the extent that managed care companies can identify those gaps and help close those gaps through quality incentives. that can have a very positive impact on costs over an extended period of time," Goodman said.

But Joy Grossman, Ph.D., HSC associate director, said HSC site visits to 12 nationally representative communities across the country show that quality initiatives and investment in information technology "are still pretty fledgling, and most of the people we spoke with didn’t really have any sense of cost effectiveness."

The outcome of the congressional debate over a patients’ bill of rights, especially giving consumers a broader right to sue health plans, also will affect how plans operate, panelists said.

"So if people want these things, and apparently, if you read the media, if you look to Congress, apparently people do," Fidel said. "I’m not so sure they will when they realize how much more it costs them."