Ten Things To Know About Health Care Cost Trends

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Ten Things To Know About Health Care Cost Trends

• Bradley Strunk
• Presented to MCOLs HealthWebSummit New
  Directions in Managing Health Care Costs

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The Center for Studying Health System Change
(HSC)

• Independent, nonpartisan research on changes in
  the organization and delivery of care and their
  impact on people
• Funded exclusively by The Robert Wood Johnson
  Foundation
• Primary research effort Community Tracking Study
  (CTS)
• Also conduct a health care cost tracking analysis
  annually
• Synthesize public and private data series
• Integrate findings from CTS site visits

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Basis of This Presentation

• Health Affairs Web-exclusive article on latest
  cost trends (available free of charge)
• http//www.healthaffairs.org/WebExclusives/Strunk_
  Web_Excl_092502.htm
• HSC Data Bulletin on latest cost trends
  (essentially, an executive summary of
  web-exclusive article also free)
• http//www.hschange.org/CONTENT/472/
• For general information about HSC, visit our
  website at www.hschange.org

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Definition of Cost

• Focus of this presentation is on health care
  costs that underlie private health insurance
  premiums in other words, the expenditures that
  are incurred when someone uses the health care
  system in this respect, health care costs can
  also be referred to as claims costs or service
  use costs
• Term spending used interchangeably with cost
• Health care cost/spending trends based on the
  Milliman USA Health Cost Index (0 deductible)
• See http//www.healthcostindex.com/

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Health Care Spending is Rising Very Rapidly

• Per capita spending up 10 in 2001
• Much larger than 1.4 increase in per capita GDP
• Someone will be paying for this

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2001 Increase Was Largest in Over a Decade
Source Milliman USA Health Cost Index (0
deductible)
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Increase in Spending On Hospital Care
Increasingly Important to Overall Cost Trend in
01
16.3
13.8
10.0
7.1
6.7
Source Milliman USA Health Cost Index (0
deductible)
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Share of Overall Cost Trend Accounted for by Each
Category
Prescription Drugs
Physician Care
Hospital Inpatient
Hospital Outpatient
Source Milliman USA Health Cost Index (0
deductible)
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3. Rising Hospital Spending Reflects Steeper
Increases in Both Prices Paid to Hospitals and
Use of Services

• Prices rising for hospitals
• Steeply rising hourly wages for hospital
  personnel
• Hospitals have more leverage with health plans
• Due to hospital consolidation
• And consumers demanding broader networks
• Rising use of services even more important
• Service use up 8 in 2001
• Reversal of trend on admission rate
• Rising use of outpatient services

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Trends in Hospital Price and Quantity
Source Hospital Price Index U.S. Department of
Commerce, Bureau of Labor Statistics PPI for
Hospital Services Hospital Quantity Index
calculated as the residual of the Milliman USA
hospital spending trend and the trend in the PPI
for Hospital Services. Note the PPI for Hospital
Services is for non-public payors and for general
medical and surgical hospitals only.
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4. Key Short-term Cost Driver Retreat From
Tightly Managed Care

• Easier access to specialists
• Fewer prior authorization requirements
• Less provider risk contracting, or capitation
• Broader provider networks

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5. Aging Plays Limited Role in Health Care Cost
Trends

• Early 1990s Agings effect is negligible
• By 2001 Aging accounted for less than 10 of
  cost trend
• Rest of this decade Aging will remain a limited
  cost driver

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Effect of U.S. Population Aging on Health Care
Costs(Annual Percentage Change)
Actual Estimates
Projections
Sources Aging Indexcalculated using data from
the 1996 and 1997 MEPS and U.S. resident
population estimates and projections of the
under-65 population from the U.S. Census Bureau
Per Capita Non-Medicare Personal Health Care
Expendituresfrom the National Health Accounts,
maintained by the Centers for Medicare and
Medicaid Services.
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6. General Economy Influences Health Care Cost
Trends

• Recent research five year lag
• Mechanism uncertain
• Employer strategies important
• During recessions, high cost trends driven by
  previous booms

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7. Advancing Medical Technology is the Dominant
Long-term Driver of Cost Trends

• Prominent studies accounts for ½ to ? of
  long-term trend in excess of general inflation
• New procedures
• New applications of old procedures
• Many innovations that reduce unit costs generate
  increased volume
• Ready acceptance is a key factor
• Public expects new cures
• Extensive third-party payment precludes costs
  from restraining technology

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8. Premium Trend is Higher Now Than Trend in
Underlying Costs

• Premium increase for 2002 12.7 percent
• Health insurance underwriting cycle (UC) plays
  important role
• Health insurer profits now up sharply
• The UC will turn but not yet

Source of premium data Kaiser Family
Foundation/Health Research and Educational Trust
Employer Benefits Survey
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9. Shift to More Patient Cost Sharing Already
Underway

• Higher deductibles, coinsurance, copayments
• Cost of coverage increased 2-3 in excess of
  premiums in 2002
• Tiered provider networks
• Consumer-driven plans

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10. Potential for Some Slowing of the Overall
Cost Trend

• Trend declined to 8.8 through first six months
  of 2002
• Potential factors
• Increased patient cost sharing
• Completion of transition to looser managed care
• CMS projects a slowdown in private personal
  health care expenditure growth in 2003

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Conclusions

• Mid-1990s was a temporary hiatus from cost
  pressures
• Financing system will force attention to the
  issue
• Emphasis now on patient financial incentives
• Approach vulnerable to backlash
• Lack of alternatives will limit response