Center for Studying Health System Change

Health Care Market Changes Promise Little Relief From Rising Costs

Growing Skepticism About Market-led Solutions to Cost, Quality and Access Problems

News Release
May 21, 2003

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ASHINGTON, D.C.—As employers shift more health care costs to workers, hospitals and physicians—unleashed by the retreat of tightly managed care—are competing fiercely for profitable specialty services, threatening to drive costs even higher, according to initial findings from HSC’s latest round of community site visits.

"Consumers and employers are worried about rising health care costs, and there’s little relief in sight based on what we’re seeing in local health care markets," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded exclusively by The Robert Wood Johnson Foundation.

"After directing health plans to abandon many cost-control measures that irritated patients and doctors, employer’s main game plan now is to give workers more of a financial stake in their care," Ginsburg said. "At the same time, the race by many hospitals and doctors to expand profitable specialty services threatens to fuel higher costs."

The retreat from tightly managed care—including adoption of broad provider networks and loosened restrictions on access to care-continues to shape local health care markets, according to the HSC Issue Brief—Health Care Cost and Access Problems Intensify: Initial Findings from HSC’s Recent Site Visits—by Cara S. Lesser, M.P.P., HSC director of site visits, and Ginsburg. The Issue Brief and four new Community Reports describing market changes in Indianapolis, Cleveland, Seattle and northern New Jersey are available here.

The market trends identified in the fourth round of HSC site visits indicate little relief is in sight from high health care cost trends. Employers’ main cost-control strategy is increased consumer cost sharing, which will likely slow health care spending trends for a few years but is unlikely to lower cost trends substantially over the long term.

Many consumers can expect to see a greater share of their paychecks go to health insurance premiums and higher out-of-pocket costs when they see a doctor, fill a prescription or go to the hospital. Continuing high cost trends also threaten the affordability of health insurance, especially for low-wage workers and small firms, increasing the likelihood that the number of uninsured Americans will continue to rise.

"The picture in local health care markets is pretty grim, and there’s growing skepticism about market-led solutions to rein in rapidly rising health care costs," Lesser said. "In many cases, the different players—employers, health plans, hospitals and physicians—are responding to immediate pressures in ways that are at odds with controlling health care spending and protecting access to high-quality care over the longer term."

Every two years, HSC researchers visit 12 nationally representative communities across the country, conducting intensive interviews with local health care leaders, including health plans, providers, policy makers, employers and consumer groups. In addition to the four community reports released recently, HSC will issue reports in the coming months covering Lansing, Mich.; Greenville, S.C.; Syracuse, N.Y.; Little Rock, Ark.; Orange County, Calif.; Boston; Miami; and Phoenix.

Key initial findings from the fourth round of HSC site visits include:

· Access at a Cost: A New Deal for Employees. With the slow economy and three consecutive years of double-digit health insurance premium increases cutting into firms’ bottom lines, employers are more aggressively shifting costs to workers. Stung by the backlash against restrictive managed care practices and workers’ desire for broad provider choice, employers have shied away from tightly managed care and are pinning their hopes on the fledgling health care consumerism movement to help rein in costs. The price and quality information consumers will need to make informed choices about the trade-offs among costs, quality and accessibility of care are still lacking for the most part, making the idea of consumer-driven health care a long-term strategy at best.

· Health Plans Prosper, Managed Care Wanes. Most health plans are more profitable than they were two years ago, mainly because premium increases have exceeded medical cost trends and plans have exited unprofitable lines of business, such as Medicare and Medicaid. But, plans are still reeling from the vigorous managed care backlash, and without a strong mandate from employers to reintroduce aggressive cost-control measures, plans have few tools to control costs. Broad provider networks are now the norm, leaving plans with little credible threat of excluding providers as a way to negotiate lower provider payment rates. Insurers are developing new products, including tiered-provider networks and so-called consumer-driven plans that link a spending account with a high-deductible policy, but so far most employers remain skeptical of the new offerings.

· Providers Fuel Cost Growth. Hospitals and physicians are making the most of the reprieve from managed care’s aggressive cost-containment tactics. Providers have focused primarily on two strategies to bolster their financial position-pressing health plans for better payment rates and contract terms and investing in select services and technology that are particularly well compensated, especially cardiac, cancer and orthopedic services. At the same time, many medical groups are opening ambulatory surgery and diagnostic centers and adding capacity to deliver radiology, laboratory and imaging services in their practices. The intense competition for niche specialty services may mean public and private payers are inadvertently overpaying for some services while underpaying for others.

· Quality Improvement Takes a Backseat to Costs. Improving quality of care remains a secondary issue to cost containment for most purchasers. Two factors appear to limit employers’ push for quality improvement-a general belief that the quality of care is already high and the view that significant reform is beyond the typical employer’s reach. Some health plans are experimenting with incentive-based provider payments for meeting quality and efficiency standards, but it is unclear whether the payments will be significant enough to capture providers’ attention and affect practice patterns and care delivery.

· Safety Net Stronger, But State Shortfalls Loom. While the retreat from tightly managed care and the intense competition for specialty services appear to have destabilized the broader health care market, many traditional providers of care for low-income and uninsured people, such as public hospitals, community health centers (CHCs) and free clinics, have grown stronger and more stable in recent years. Many safety net providers and consumer advocates are concerned, however, that state budget crises will reverse this progress, particularly at a time when demand for safety net services is on the rise because of the slow economy.

Stakeholder Comments on the HSC Study

Ron Pollack, executive director, Families USA, www.familiesusa.org
"As employers shift more health costs onto the shoulders of their employees, an increasing number of workers will find those costs unaffordable. The inevitable result is that many working families—especially those dependent on breadwinners in lower- or moderate-wage jobs—will be forced to drop their job-based health coverage. This coupled with the number of people losing health coverage due to layoffs and cutbacks in safety net health programs such as Medicaid will cause a large increase in the number of Americans who will join the ranks of the uninsured."

Rick Pollack, executive vice president, American Hospital Association, www.aha.org
"Today, more Americans are seeking hospital services and the cost of providing that service—driven by factors beyond hospitals’ control such as rising costs of pharmaceuticals, new technology and medical liability insurance and the workforce shortage—are growing. At the same time, specialty providers are cherry picking patients with less complex medical issues, leaving community hospitals to care for the sickest of the sick—a trend that threatens hospitals’ ability to meet the basic health needs of their community."

Donald Young, M.D., president of the Health Insurance Association of America, www.hiaa.org
"Employer-sponsored health insurance remains the bedrock of America’s health care financing system—and one of the best deals workers have today. Despite the fact that their paycheck deduction has gone up a little this past year (on average about $25 a month for family coverage), employees pay a smaller share of their health insurance premium than they did a decade ago, and their out-of-pocket spending for health care has reached an historic low. To be sure, everyone involved in the health care financing and delivery system—patients, providers, purchasers, payers and policymakers alike—must address the underlying causes of spiraling health care costs. But, rather than succumb to a doom and gloom scenario, we must give the private market the freedom to innovate and the flexibility to meet the needs and preferences of the American consumer."

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.