Center for Studying Health System Change

Health Care Spending Growth in 2003 Posts First Major Slowdown in a Decade

Despite Downtick, Health Care Spending Growth Continues to Outpace Economic Growth

News Release
June 9, 2004

FURTHER INFORMATION, CONTACT:
Alwyn Cassil: (202) 264-3484

Editor’s Note: A webcast interview with Brad Strunk and Paul Ginsburg concerning this study is available courtesy of the Kaiser Family Foundation. Click here to view the webcast.

ASHINGTON, D.C.—Health care spending per privately insured American increased 7.4 percent in 2003—the first major slowdown in spending growth in nearly 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.

Despite the downtick, health care spending grew nearly twice as fast as the overall economy, which increased 3.8 percent in 2003 as measured by growth in per capita gross domestic product.

Although still high by historical standards, health care spending growth slowed for the second year in a row in 2003, down from 9.5 percent in 2002 and the 10 percent peak in 2001. Trends in all four spending categories—inpatient and outpatient hospital care, prescription drugs, and physician services—continued to slow in 2003. Moreover, the decline in spending growth has slowed growth in employer-sponsored health insurance premiums to an average 12 percent in 2004, marking the first slowdown in premium growth since 1996.

"Health care costs and premiums continue to grow much faster than workers’ income, making health insurance increasingly unaffordable for more and more people," said Paul B. Ginsburg, Ph.D., coauthor of the study and president of HSC, a nonpartisan policy research organization funded principally by The Robert Wood Johnson Foundation.

For the third straight year, consumers in 2003 faced significant increases in cost sharing as purchasers bought down the value of health benefits, primarily by increasing deductibles, copayments and coinsurance, where patients pay a percentage of the total cost of care.

"While employers are falling back on increased patient cost sharing to help slow health care cost growth, it’s unlikely that increased patient cost sharing alone will significantly slow cost trends over time," said Bradley C. Strunk, an HSC research analyst and study coauthor. "Research is clear that over the long haul the key long-term driver of medical cost trends is new technology."

Spending on inpatient hospital care increased 6.5 percent in 2003, down from 8.4 percent in 2002. Spending on hospital outpatient care—which includes services provided by both hospital-based and freestanding outpatient facilities—increased 11 percent in 2003, down from 12.9 percent in 2002. Growth in inpatient and outpatient hospital spending in 2003 accounted for more than half of the overall spending increase (53%) for the third straight year.

The hospital utilization trend slowed sharply in 2003, signaling the completion of the transition to looser forms of managed care. However, hospital price increases accelerated for the sixth year in a row, increasing 8 percent in 2003, the largest one-year rise since measurement of negotiated hospital prices began a decade ago. Other key findings include:

• For the fourth year in a row, prescription drug spending per privately insured person increased at a slower pace, growing 9.1 percent in 2003—substantially lower than the 2002 increase of 13.2 percent and less than half the 1999 peak increase of 18.4 percent. Slowing of trends for both drug prices and utilization played a role in this turnaround. Several factors explain the slowdown, including increased patient cost sharing, fewer new drug introductions and greater use of generic drugs. Prescription drug spending accounted for 20 percent of the overall total spending increase in 2003 compared with 34 percent in 1999.
• Spending on physician care increased 5.1 percent in 2003, compared with 6.5 percent in 2002, and again was the slowest growing category of health spending. This slowdown reflects a sharp decline in the rate of growth of physician use, while growth in prices for physician services increased slightly.

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.

In recent years, premium growth has outstripped growth in underlying health costs by several percentage points. But high profitability in health insurance, combined with regulatory pressures on some nonprofit health plans to reduce their surpluses may stimulate more aggressive pricing by insurers.

Such a turn in the so-called health insurance underwriting cycle—the industry’s interdependent pattern of profitability and pricing—could help continue to drive the premium trend down and narrow the gap between the premium and cost trends. However, a turn in the underwriting cycle alone would not slow the premium trend to the low levels experienced in the mid-1990s; only a sustained and substantial decline in the cost trend would do that.

Stakeholder Comments on the HSC Study

Helen Darling, president, National Business Group on Health, www.businessgrouphealth.org
"Given the state of the economy and global competitiveness, even this slightly lower rate of increase in health care trend is still little consolation. Almost nothing else in our businesses or the economy grows at this rate. But these costs are not the only source of concern; it is what we are getting for our health care investment. Research on quality and patient safety continue to provide evidence that only about half of the time does this substantial investment get us care that medical experts recommend."

Rick Pollack, executive vice president, American Hospital Association, www.aha.org
"Hospitals are working to provide care more efficiently as evidenced by today’s news that growth in spending on hospital services has declined. At the same time it’s important to note that cost pressures continue given increased demands for care and spiraling costs of pharmaceuticals, labor and technology. It’s also interesting to note that premium increases continue to outpace growth in health costs. That deserves further study."

Gail Shearer, director of health policy analysis, Consumers Union, www.consumersunion.org
"Despite a modest slowdown, health care costs continue to rise rapidly, threatening the affordability of health insurance for more and more people. Marketplace changes-combined with recent legislation that provides tax incentives that encourage high-deductible coverage-are steering our health care system further from the goal of spreading costs broadly across the entire population. Tragically, the long-term impact is likely to be increased financial barriers to getting needed health care, placing a growing burden on the sick and those with low-incomes."

Karen Ignagni, president and CEO, America’s Health Insurance Plans, www.ahip.net
"While the tools and techniques used by our members have contributed to bringing down the trend line, the nation must be focused on the drivers of health care costs. In order to do that, consumers need information on the cost and quality of treatments in all health care settings."

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research 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 principally 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. For more information, contact Jon Gardner at Health Affairs at (301) 656-7401, ext. 230, or via e-mail, press@healthaffairs.org.