Center for Studying Health System Change

Spending on Hospital Care Drives Double-Digit Jump in Health Costs

Outpatient Hospital Care Surpasses Drugs as Fastest Growing Cost Component

News Releases
Sept. 25, 2002

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Alwyn Cassil: (202) 264-3484

ASHINGTON, D.C.—Spending on health care jumped 10 percent in 2001, the first double-digit increase in more than a decade, according to a study by the Center for Studying Health System Change (HSC) published today as a Web-exclusive article in the journal Health Affairs.

Driven by increased use of services and higher prices (payment rates), spending on inpatient and outpatient hospital care climbed 12 percent in 2001, accounting for more than half, or 51 percent, of the overall health care spending increase.

"People are getting more tests and treatments as managed care plans abandon tight restrictions on care, but higher hospital prices are playing a role as well in rising costs," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded exclusively by The Robert Wood Johnson Foundation.

The study analyzes per capita spending on health care services—inpatient and outpatient hospital care, physician services and prescription drugs—commonly covered by private insurance. Per capita health care spending trends—also often referred to as cost trends—are important because they determine long-term health insurance premium trends.

Growing use of services accounted for about two-thirds of increased spending on hospital care, with the other third coming from higher payment rates, thanks, in part, to hospitals’ increased bargaining clout with health plans, the study found.

Rapidly rising health care spending helped spark a 15 percent average increase in the cost of employer-sponsored health insurance in 2002, including a 12.7 percent premium increase and a 2 percent to 3 percent "benefit buy-down" by employers who reduced benefits and increased employee cost sharing.

"Higher premiums are almost certainly going to result in more Americans becoming uninsured. More people will decide they can’t afford health insurance, and some businesses, especially small firms, will drop coverage," Ginsburg said.

"Increased cost sharing means people will pay more when they go to the doctor or fill a prescription," Ginsburg said. "Giving consumers more of a financial stake in their care can raise awareness about costs and encourage more responsible health care choices, but too much cost sharing can create barriers to needed care, especially for low-income people and people with chronic illnesses."

Early evidence from 2002 suggests overall health care cost trends may have peaked in 2001. Higher consumer cost sharing appears to be slowing demand for care, and much of the recent growth in utilization may be a one-time consequence of the retreat from tightly managed care. Through June 2002, compared with the same period in 2001, the increase in total spending per capita, while still high, slowed to 8.8 percent.

The study is available online at www.healthaffairs.org, and the findings also are detailed in a new HSC Data Bulletin—Tracking Health Care Costs: Hospital Spending Spurs Double-Digit Increase in 2001. A second HSC Data Bulletin—Aging Plays Limited Role in Health Care Cost Trends—is available as well.

A webcast of a National Press Club briefing on the study will be made available by kaisernetwork.org, a free service of the Kaiser Family Foundation, after 12 p.m. EDT on Wednesday, Sept. 25. The webcast, transcript and related resources can be found here

Other key findings of the study include:

• Spending on outpatient hospital care grew 16.3 percent in 2001, accounting for 37 percent of the overall health care spending increase. Outpatient spending was the fastest growing component of overall spending, surpassing prescription drugs for the first time since 1995.
• Spending on inpatient care jumped 7.1 percent in 2001, accounting for 14 percent of the overall increase. Growing at almost three times the 2000 rate, inpatient spending continued a stunning reversal from 1997, when inpatient spending decreased 5.3 percent.
• Spending on prescription drugs rose 13.8 percent, slowing for the second year in a row and contributing 21 percent to the overall spending increase.
• Spending for physician services increased 6.7 percent, accounting for 28 percent of the overall spending increase.

The study also shows that hospitals are facing significant financial pressures from rising payroll costs. Hospital payroll costs grew 8.6 percent in 2001—more than double the 3.7 percent increase in 2000—because of increases in both wage rates and hours worked. Hospitals are probably facing even steeper payroll increases because the study didn’t capture increased costs for agency nurses and other workers who are contractors rather than employees.

The average hourly hospital wage grew 6.1 percent in 2001—nearly double the 2000 pace—providing evidence of the financial pressures on hospitals from the severe shortage of nurses and other skilled employees. Total hours worked by hospital workers also grew in 2001, up 2.4 percent compared with 0.4 percent in 2000, reflecting the increased use of hospital services.

To control rising premiums, many employers "bought down" the price of health insurance in 2002 by reducing benefits and increasing patient cost-sharing requirements. The most important benefit buy-downs were increased deductibles and higher drug copayments.

"The economic slowdown has allowed employers to reduce health benefits more aggressively because they don’t have to compete as hard to attract and retain workers," said Bradley C. Strunk, an HSC research analyst and lead author of the study written with Ginsburg and Jon R. Gabel, Ph.D., vice president of the Health Research and Educational Trust.

Employers, however, did not raise the proportion of the total premium that employees are required to pay. In both 2001 and 2002, employees paid about 15.5 percent of the cost of single coverage and 27.3 percent of the cost of family coverage.

Gail Shearer, director of health policy analysis, Consumers Union, www.consumersunion.org
"As health care spending and insurance premiums continue spiraling upward, more and more consumers, especially lower-income people, will find health coverage unaffordable. At the same time, as employees’ out-of-pocket costs grow, more people will find themselves underinsured."

Helen Darling, president, Washington Business Group on Health, www.wbgh.org
"As health care costs continue rising rapidly, employers have little choice but to share increased costs with employees. While employers are giving workers more of a financial stake in decisions about their care, employers also are providing more health care decision support tools to help employees make more informed choices about their care and what they can do to help lead healthier lives."

Carmela Coyle, senior vice president for policy, American Hospital Association, www.aha.org
"For years, hospitals kept their costs at historically low levels. But today’s hospitals are facing a new set of challenges. The shortage of nurses and other caregivers is driving up labor costs; prescription drug and technology costs are spiraling out of control; and the ranks of the nation’s uninsured continue to swell. At the same time, demand for hospital services is rising as the baby boomers age and medical advances allow us to care for and cure more Americans.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely insights on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded exclusively by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.

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 Jon Gardner at Health Affairs, 301-656-7401, ext. 230, or via e-mail, press@healthaffairs.org.