Ten Things To Know About Health Care Cost Trends

1
Ten Things To Know About Health Care Cost Trends

• Paul B. Ginsburg, Ph.D.
• October 22, 2002

2
The Center for Studying Health System Change
(HSC)

• Independent research on changes in the
  organization and delivery of care and their
  impact on people
• Funded exclusively by The Robert Wood Johnson
  Foundation
• Community Tracking Study (CTS)
• Annual health care cost tracking analysis
• Synthesize public and private data series
• Findings from CTS site visits
• www.hschange.org

3
Concepts

• Health insurance premiums
• Costs underlying private health insurance
• Major categories
• Price versus quantity
• Input costs for health care providers

4
Spending is Rising Very Rapidly

• Per capita spending up 10 in 2001
• First double-digit increase since 1990
• Much larger than 1.4 increase in per capita GDP
• Someone will be paying for this

5
2. Hospital Care is the Largest Component of Cost
Trends in 2001

• Outpatient spending increased 16.3
• Inpatient spending increased 7.3
• Enormous reversal from 5.3 decrease in 1997
• Combined hospital trend accounts for 51 of total
  spending increase in 2001
• Accounted for only 18 in 1997
• Prescription drug spending in 2001
• 13.8 increase
• Accounts for 21 of total spending increase

6
3. Rising Hospital Spending Reflects Steeper
Increases in Prices Paid to Hospitals and Use of
Services

• Prices rising for hospitals but not physicians
• Steeply rising hourly wages
• More leverage with health plans
• Consolidation
• Broad 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

7
Trends in Hospital Price and Quantity

Compares data for Jan-June 2002 to corresponding
months in 2001. Note the PPI for Hospital
Services index is for non-public payors and for
general medical and surgical hospitals only.
The quantity index is calculated as the residual
of the Milliman USA hospital spending trend and
the trend in the PPI for Hospital Services.
8
Physician Spending Rising--But Slowly

• Physician spending increased 6.7 percent in 2001
• Trend very stable 1998-2001
• Price 1.7 percent per year
• Quantity 4.2 percent per year
• Physicians have less leverage than hospitals
• Some notable exceptions

9
4. Key Short-term Cost Driver Retreat From
Tightly Managed Care

• Decline in prior authorization requirements
• Easier access to specialists
• Broad networks lead to higher prices for services
• Rich managed care benefit structure remainsfor
  now

10
5. Demographic Trends Contribute Only Slightly to
Rising Costs

• Contribution of aging to cost trend
• 2001 0.7
• 1990 0.1
• Explains little of increase in underlying cost
  trend
• 2001 10.0
• 1996 2.2
• Implication More of trend potentially
  controllable

11
6. General Economy Influences Health Care Costs

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

12
7. New Technology is the Dominant Long-term
Driver of Costs

• Prominent studies one-half to two-thirds of
  increase 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

13
8. Premium Trend is Higher Now Than Trend in
Underlying Costs

• Premium increase in 2002 12.7
• Underlying cost trend 10 or less
• Insurer profits up sharply
• Insurance underwriting cycle will turnbut not yet

14
9. Shift to More Patient Cost Sharing Already
Underway

• Deductibles, coinsurance, copayments
• Cost of coverage increased of 2-3 in excess of
  premiums in 2002
• Tiered networks
• Consumer-driven plans
• Consumer information on quality and price

15
10. Potential for Some Slowing of Trend

• Trend declined to 8.8 for early 2002
• Increased cost sharing
• Completion of transition to looser managed care
• Projections for period through 2010
• Critical decisions on planning hospital capacity
  and physician supply

16
Perspectives on Cost Containment in Future

• Culture of cures no matter what the cost
• Costs often invisible
• Medical care has always been a superior good
• Financing mechanisms will force attention to
  costs
• Funding through taxes
• Funding through employment

17
Only Three Basic Mechanisms to Constrain
Costs

• Administrative controls
• Patient/provider financial incentives
• Constraints on supply

18
Can a Consumer-driven System be Created?

• Traditional limitations of cost sharing
• Incentives for some are barriers to others
• Most spending is for very sick patients
• New designs
• Tiered copayment
• Positive incentives
• Income-related benefit structure
• Incentives to use efficient providers

19
Can a Consumer-driven System be Created (contd)

• Potential for cultural change
• Many confront need to economize
• Information on treatment alternatives and
• provider price and quality

20
Will Restrictive Managed Care Return?

• Bimodal distribution of consumer perspectives
• Plan choice versus point of service choice

21
Implications of Government Interest in Containing
Costs

• Sensitivity to implications for insurance
  coverage
• Opposition to mandates
• Interest in malpractice reform
• Interest in pharmaceutical pricing
• Efforts to constrain supply
• But no Cost Containment Act of 2003

22
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