Center for Studying Health System Change

Health Care Spending Pace in 2002 Slowed Slightly but Remained High

Rapid Spending Growth Threatens Affordability of Health Insurance

News Release
June 11, 2003

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ASHINGTON, D.C.— Health care spending per privately insured American jumped 9.6 percent in 2002, growing nearly four times faster than the overall U.S. economy, according to a study by HSC published today as a Web-exclusive article in the journal Health Affairs.

While slightly smaller than the 10 percent spending jump in 2001, the 2002 increase is extremely high by historical standards. Moreover, 2002 health care spending grew much more rapidly than the overall economy, which increased 2.7 percent in 2002 as measured by per capita growth in gross domestic product.

"The good news is that health care spending growth slowed for the first time in five years, but the bad news is that health care spending continues to increase rapidly," said Paul B. Ginsburg, Ph.D., coauthor of the study and president of HSC, a nonpartisan policy research organization funded exclusively by The Robert Wood Johnson Foundation.

Despite the slight decrease in 2002 spending growth, employer-based health insurance premium trends rose again in 2003, increasing an average 15 percent—the largest jump in at least a decade. Premium increases would have been even higher in 2003-an estimated average 18 percent—if not for increased consumer cost sharing through higher deductibles, copayments and coinsurance.

"Unless underlying health care cost trends slow significantly, health insurance premiums will continue to rise rapidly and the number of uninsured Americans will increase," Ginsburg said.

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, which is primarily employer based. Per capita health care spending trends—also often referred to as cost trends—are important because they largely determine long-term health insurance premium trends.

Rapid growth in hospital spending—increasingly driven by price inflation rather than increased use of services—accounted for more than half of the overall spending increase (51%) for the second straight year.

Spending on inpatient hospital care increased 6.8 percent in 2002, accounting for 14 percent of the overall spending increase. The continued rapid growth in inpatient spending is especially striking when compared with the mid-1990s when inpatient spending actually decreased.

Spending on outpatient hospital care—which includes services provided by both hospital-based and freestanding outpatient facilities—grew 14.6 percent in 2002, accounting for 37 percent of the overall health care spending increase. Outpatient spending grew at the fastest annual rate of the four major components of overall health spending, surpassing the annual growth rate of prescription drugs for the second year in a row.

After climbing 8 percent in 2001, growth in the utilization of inpatient and outpatient hospital services slowed to 5.7 percent in 2002. The slowdown is likely a result of increased patient cost sharing, which leads to less use of services, and the completion of the transition to more loosely managed care.

Hospital prices increased 5.1 percent in 2002, the largest increase in a decade. As a result of higher prices and the slowing trend of increased utilization, price inflation accounted for almost half of the increase in inpatient and outpatient hospital spending in 2002, compared with about a third in 2001.

"Recent evidence from our site visits suggests hospitals continue to use their formidable negotiating leverage to seek large payment rate increases from health plans—in part to reverse the effect of discounted hospital payment rates in the mid-1990s," said Bradley C. Strunk, an HSC research analyst and study coauthor.

Hospitals also may be seeking to pass through higher wage increases granted in response to labor shortages, particularly for nurses. Growth in hospital wage rates slowed in 2002 but continued to be high, growing 5.5 percent, down from 6.1 percent in 2001.

Other key findings include:

· Spending on prescription drugs rose 13.2 percent, slowing for the third year in a row and contributing 22 percent to the overall spending increase. Several factors help explain the slowdown, including increased use of three-tier copayment structures, a reduction in new drug introductions and greater availability of generic drugs.

· Spending for physician services increased 6.5 percent, accounting for 27 percent of the overall spending increase. Both higher prices and greater use of physician services played a role, but growing utilization was the more important factor.

The study is available online at www.healthaffairs.org/WebExclusives/Strunk_Web_Excl_061103, and the findings also are detailed in a new HSC Data Bulletin-Tracking Health Care Costs: Trends Stabilize but Remain High in 2002-available online by clicking here. A webcast of a National Press Club briefing on the study will be made available online by kaisernetwork.org, a free service of the Kaiser Family Foundation, after 12:30 p.m. EDT on Wednesday, June 11 at www.kaisernetwork.org/healthcast/hsc/11jun03. Along with the webcast, speaker bios, a transcript and related resources will be available.

Stakeholder Comments on the HSC Study

Gail Shearer, director of health policy analysis, Consumers Union, www.consumersunion.org
"The continued rapid rise in health care costs is bad news for consumers and means more Americans will have trouble affording health coverage. The growing financial burden of health care costs continues to fall disproportionately on people with low incomes and people who are sick. This study should remind policymakers of the need for system-wide reforms that will get more bang for our health care dollar and distribute the costs of health care more fairly."

Helen Darling, president, Washington Business Group on Health, www.wbgh.org
"Corporate America is still struggling with a sluggish economy, low consumer confidence and soft consumer spending, worsened by falling prices for many of the goods and services they produce. Businesses can’t continue to absorb the rapid increases in health care costs. Modest increases in cost sharing have been a part of employers’ benefits strategy for the past two years, and employers will have to continue to share the burden of higher health costs with workers. At the same time, many firms are working to provide employees with more information to help them make more informed choices about their health care. Nonetheless, increased cost sharing, while modest on a percentage basis, will be seen as costly to employees whose wages are virtually flat or increasing at low levels, even if they still have a job."

Rick Pollack, executive vice president, American Hospital Association, www.aha.org
"Today’s hospitals face a severe workforce shortage and escalating costs for medical liability insurance, pharmaceuticals and technology. The cost of caring for patients is growing faster than payments and hospitals’ financial health is declining. In contrast, insurance premium increases continue to outpace health care expenses with the profitability of insurers on the rise. This demonstrates that hospitals are not the ones in the driver’s seat."

Karen Ignagni, president, American Association of Health Plans, www.aahp.org
"The impact of rising prices for health care services is being felt throughout our society, and we are encouraging policymakers and candidates both to seriously address the question of how to make coverage more broadly available and affordable. Our members are doing their part. These new data show that health plan chronic care/pharmacy programs are having a favorable impact on cost trends at the same time that other new data demonstrate their impact on quality."

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, jgardner@projecthope.org