Hospital Spending Drives Largest Health Care Cost Increase in a Decade
Prescription
Drug Spending, While Still High, Slows in 2000
WASHINGTON, D.C.—Contrary to conventional wisdom, hospital spending—not prescription drugs—accounted for the largest share of increased health care costs in 2000, according to a study by the Center for Studying Health System Change (HSC) published today on HealthAffairs.org as a Web-exclusive article.
Overall, health care costs increased 7.2 percent in 2000—the largest jump in a decade—with inpatient and outpatient hospital care accounting for nearly half, or 47 percent, of the overall increase, according to the study, “Tracking Health Care Costs.”
“Hospital spending is back with a vengeance, and the likely causes are the retreat from tightly managed care, which has increased demand for hospital services, and rising labor costs,” said Paul B. Ginsburg, Ph.D., a study co-author and president of HSC, a nonpartisan policy research organization funded solely by The Robert Wood Johnson Foundation.
Rising medical costs in 2000 helped fuel an average 11 percent premium increase for employer-sponsored coverage in 2001. Consumer demand for broad networks of hospitals and physicians and health plans’ easing of care restrictions, coupled with hospital consolidation and reduction in excess capacity, have increased some hospitals’ bargaining clout with health plans.
“The volatile combination of rising costs, increasing premiums and a slowing economy have set the stage for consumers to pay more for care and an increase in the number of uninsured Americans,” Ginsburg said.
A new HSC Data Bulletin, Tracking Health Care Costs: Hospitals Surpass Drugs as Key Cost Driver, adapted from the Health Affairs’ article, is available at www.hschange.org. This is HSC’s sixth annual analysis of health care cost and premium trends.
In 2000, health care spending reflected significant shifts in the underlying components driving higher costs:
· Spending for outpatient care increased 11.2 percent in 2000—up from an 8.9 percent increase in 1999—and accounted for 37 percent of the overall cost increase compared to 21 percent in 1999. The 2000 outpatient increase was the largest since 1992.
· Spending for inpatient care increased 2.8 percent in 2000—up from a 1.6 percent increase in 1999—and accounted for 10 percent of the overall cost increase compared to 5 percent in 1999. The increase in inpatient costs signals a dramatic departure from the 1994-98 trend, when inpatient spending actually declined year-to-year by as much as 5.3 percent.
· Spending for prescription drugs—while still high—slowed, dropping to 14.5 percent in 2000—down from an 18.4 percent increase in 1999. Prescription drug spending accounted for 27 percent of the overall increase in 2000, down substantially from 41 percent in 1999. Two factors likely caused the reduction: a lack of new “blockbuster” drugs and the rapid shift to three-tier pharmacy benefits. Early 2001 cost information, however, shows prescription drug spending is again on an upward trend.
· Spending for physician services slowed in 2000 to 4.8 percent—down from a 5.7 percent increase in 1999—and accounted for 25 percent of the overall cost increase compared to 33 percent in 1999. While insurers’ payments to physicians increased steadily in the late ‘90s, this trend leveled off in 2000.
Early information about 2001 costs indicates spending for inpatient and outpatient hospital care and prescription drugs is continuing to climb, while spending for physician services has remained flat.
An analysis of health services payroll costs indicates that payroll growth is a key driver of overall health care costs. Perhaps because of nursing and other staff shortages, payroll costs for all health services, including hospitals, increased 4.7 percent in 2000 compared to 3.1 percent in 1999. Hospital payroll costs increased 3.7 percent in 2000 compared to 2.6 percent in 1999. Through May 2001, payroll costs were significantly higher compared to the same period in 2000, rising 7 percent for all health services and 7.6 percent for hospitals. Also, during the first five months of 2001, average hourly wage growth increased sharply, particularly for hospitals, again likely reflecting labor shortages.
Ron Pollack, executive director, FamiliesUSA
“As medical costs and premiums continue to spiral upward, employers are clearly going to shift more costs to workers. Consumers, especially low-income people, are going to be in the difficult position of paying more or large numbers of them will find health coverage unaffordable and will become uninsured.”
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Karen Ignagni, president and CEO, American
Association of Health Plans
“This study reflects what our member plans are experiencing around the country: requests from providers for substantial increases in reimbursement. On the one hand, employers and consumers are relying on plans to provide affordable coverage, while on the other hand, providers are asking for sizeable increases.”
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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 Jackie Graves at Health Affairs, 301-656-7401, ext. 255, or via e-mail, press@healthaffairs.org.