Center for Studying Health System Change

Hospital Spending Drives Largest Health Care Cost Increase in a Decade

Prescription Drug Spending, While Still High, Slows in 2000

News Releases
September 26, 2001
Revised - October 25, 2001

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Alwyn Cassil: (202) 264-3484

ASHINGTON, D.C.—Contrary to conventional wisdom, hospital spending—not prescription drugs—accounted for the largest share of increased health care costs in 2000, according to a study by the Center for Studying Health System Change (HSC) published today on HealthAffairs.org as a Web-exclusive article.

Overall, health care costs increased 7.2 percent in 2000—the largest jump in a decade—with inpatient and outpatient hospital care accounting for nearly half, or 43 percent, of the overall increase, according to the study, "Tracking Health Care Costs."

"Hospital spending is back with a vengeance, and the likely causes are the retreat from tightly managed care, which has increased demand for hospital services, and rising labor costs," said Paul B. Ginsburg, Ph.D., a study co-author and president of HSC, a nonpartisan policy research organization funded solely by The Robert Wood Johnson Foundation.

Rising medical costs in 2000 helped fuel an average 11 percent premium increase for employer-sponsored coverage in 2001. Consumer demand for broad networks of hospitals and physicians and health plans’ easing of care restrictions, coupled with hospital consolidation and reduction in excess capacity, have increased some hospitals’ bargaining clout with health plans.

"The volatile combination of rising costs, increasing premiums and a slowing economy have set the stage for consumers to pay more for care and an increase in the number of uninsured Americans," Ginsburg said.

A new HSC Data Bulletin, Tracking Health Care Costs: Hospital Care Key Cost Driver in 2000, adapted from the Health Affairs’ article, is now available. This is HSC’s sixth annual analysis of health care cost and premium trends.

In 2000, health care spending reflected significant shifts in the underlying components driving higher costs:

• Spending for outpatient care increased 11.2 percent in 2000—up from an 8.9 percent increase in 1999—and accounted for 31 percent of the overall cost increase compared to 24 percent in 1999. The 2000 outpatient increase was the largest since 1992.
• Spending for inpatient care increased 2.8 percent in 2000—up from a 1.6 percent increase in 1999—and accounted for 12 percent of the overall cost increase compared to 7 percent in 1999. The increase in inpatient costs signals a dramatic departure from the 1994-98 trend, when inpatient spending actually declined year-to-year by as much as 5.3 percent.
• Spending for prescription drugs—while still high—slowed, dropping to 14.5 percent in 2000—down from an 18.4 percent increase in 1999. Prescription drug spending accounted for 29 percent of the overall increase in 2000, down from 35 percent in 1999. Two factors likely caused the reduction: a lack of new "blockbuster" drugs and the rapid shift to three-tier pharmacy benefits. Early 2001 cost information, however, shows prescription drug spending is again on an upward trend.
• Spending for physician services slowed in 2000 to 4.8 percent—down from a 5.7 percent increase in 1999—and accounted for 28 percent of the overall cost increase compared to 34 percent in 1999. While insurers’ payments to physicians increased steadily in the late ’90s, this trend leveled off in 2000.

Early information about 2001 costs indicates spending for inpatient and outpatient hospital care and prescription drugs is continuing to climb, while spending for physician services has remained flat.

The large difference between the 2001 premium increase and the underlying cost increase in 2000—11 percent vs. 7.2 percent, respectively—indicates both expectations for still higher cost increases and the current stage of the health insurance underwriting cycle. The underwriting cycle reflects the spread between expected cost increases and premium increases moving back and forth from positive to negative over time. In 2001, insurers moved to restore profit margins by setting premium increases above expected cost increases.

The underwriting cycle also explains the large spread between 2001 premiums for fully insured and self-insured employer plans—12.3 percent vs. 9.5 percent, respectively. The 9.5 percent increase for self-insured plans likely reflects insurer expectations of future cost increases because self-insured plans’ premiums typically track underlying medical costs more closely than fully insured plans’ premiums.

Insured consumers largely have been sheltered from cost increases in recent years because employers have paid a disproportionate share of premium increases. But the slowing economy and sagging corporate profits signal a likely change in employers’ willingness to continue absorbing increased costs. Employers already have increased patient cost sharing for pharmaceuticals and are expected to do the same for hospital and physician services.

An analysis of health services payroll costs indicates that payroll growth is a key driver of overall health care costs. Perhaps because of nursing and other staff shortages, payroll costs for all health services, including hospitals, increased 4.7 percent in 2000 compared to 3.1 percent in 1999. Hospital payroll costs increased 3.7 percent in 2000 compared to 2.6 percent in 1999. Through May 2001, payroll costs were significantly higher compared to the same period in 2000, rising 7 percent for all health services and 7.6 percent for hospitals. Also, during the first five months of 2001, average hourly wage growth increased sharply, particularly for hospitals, again likely reflecting labor shortages.

"In contrast to the last time cost trends were this high—in the early 1990s—the cost-containment strategies of managed care are now in retreat, leaving employers few ways to stem the rising cost tide except to shift costs to workers or reduce benefits," Ginsburg said.

Ron Pollack, executive director, FamiliesUSA
"As medical costs and premiums continue to spiral upward, employers are clearly going to shift more costs to workers. Consumers, especially low-income people, are going to be in the difficult position of paying more or large numbers of them will find health coverage unaffordable and will become uninsured."

Kate Sullivan, director of health policy, U.S. Chamber of Commerce
"Given the current economic climate and uncertainty, employers can’t continue to absorb double-digit health care premium increases year after year and remain competitive in the global marketplace. Public payers into the health care system must hold up their end of the bargain, and health plan enrollees need to become more active consumers with a better understanding of the true costs of care. Otherwise, more working Americans won’t be able to afford their health plans and will join the ranks of the uninsured."

Karen Ignagni, president and CEO, American Association of Health Plans
"This study reflects what our member plans are experiencing around the country: requests from providers for substantial increases in reimbursement. On the one hand, employers and consumers are relying on plans to provide affordable coverage, while on the other hand, providers are asking for sizeable increases."

Health Affairs, published by Project HOPE, is a bimonthly, multidisciplinary journal devoted to publishing the leading edge in health policy thought and research. Copies are provided free to interested members of the press. Address inquiries to Jackie Graves at Health Affairs, 301-656-7401, ext. 255, or via e-mail,press@healthaffairs.org.