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Tuesday, January 8, 2002, at 12:01 a.m.


Hospital Spending Main Culprit Driving Up Health Costs
Prescription Drug Expenditures Still Growing at Double-Digit Rates

(Washington D.C.) - After nearly a decade of stability, health care spending grew to $1.3 trillion in 2000, up nearly 7 percent from 1999, and the fastest acceleration in 12 years, says a federal report released today in the journal Health Affairs. These changes mark an "end of an era of reasonable health care cost growth throughout most of the 1990s," according to federal officials. Consequently, consumers will pay more out-of-pocket for health care services, and employers will be less inclined to offer health insurance to workers as health services become more expensive.

The year's report on health spending, based on the latest available data, was written by economists in the National Health Statistics Group (NHSG) at the Centers for Medicare and Medicaid Services (CMS). Their report appears in the January/February 2002 issue of Health Affairs. Written by Katharine Levit, Cynthia Smith, and colleagues, the report examines trends in public and private insurance spending on hospital care, prescription drugs, nursing home care, and home health care.

In a major change, health care spending consumed 13.2 percent of the gross domestic product (GDP) in 2000. This is the second consecutive year that health spending growth outpaced growth in GDP, and a signal that the nine-year stability in which health care spending grew in tandem with GDP is over, say the authors.

"This very well may be the end of an era" in health care spending, says Katharine Levit, director of the NHSG. "We have had a very unusual set of circumstances since 1992. Now we are reverting to a more historical rate of spending growth when health care was growing faster than GDP," she says.

Data for 2001 indicate that GDP growth has continued to slow, whereas health care employment, medical inflation, and premium growth have escalated. "This suggests a stronger increase in the health spending share of GDP in the near future," say the authors. This rise in health care spending is occurring amid a sluggish economy that is producing job layoffs and less profitability for businesses. As a result, both public and private payers are feeling increased pressure to find ways to finance accelerating health care costs from decelerating incomes and revenues.

"In this environment, employers are going to be inclined to choose less costly options for health plans and consumers may be asked to pony up a little more for their health care," says NHSG economist Cynthia Smith. "Those who are uninsured are going to have a difficult time paying for health care services and those who are insured are looking at higher premiums."

Hospitals Driving Growth

In contrast to recent years, hospitals drove spending growth in 2000. Hospital spending rose to $412 billion in 2000, a 5.1 percent increase from 1999 and the first such rise since 1993. Hospital spending hasn't risen above 4 percent since that year. Both inpatient and outpatient hospital spending contributed to faster growth in 2000. Medicare hospital spending grew 4.5 percent, the highest rate of growth since 1997.

The rise in Medicare hospital spending growth is attributable to recent "fixes" to the 1997 Balanced Budget Act (BBA). Swayed by hospital complaints, Congress in 2000 passed the Balanced Budget Refinement Act (BBRA). This law reduced mandated Medicare cuts under the BBA for certain hospitals. The effects of the BBRA boosted total Medicare spending growth to 5.6 percent in 2000.

A retreat from strict insurer management of medical care and providers' reactions to managed care led to higher expenditures. Hospitals are taking a stronger stance in negotiating with managed care plans. Hospital consolidation into networks and systems has increased their bargaining power for higher payments from insurers.

Hospitals also have seen a rise in their labor costs. Weekly wages paid to workers in private hospitals grew 4.1 percent in 2000, up from 2.3 percent in 1999, according to the report. Hospitals have had to hire costlier temporary staff, provide more flexible work arrangements, and offer signing bonuses to meet their staffing needs.

Private Spending Up

As with public spending, the pace of private health care spending quickened in 2000, growing 6.9 percent, up nearly a percentage point over 1999 growth. This is due in part to accelerating private insurance premium growth. Health insurance premiums reached $444 billion in 2000, up 8.4 percent from 1999, making this one of the fastest-growing sources of payment for health care. Premiums increased primarily because benefit costs rose, especially for prescription drugs, say NHSG staff.

Consumers also have been choosing less restrictive forms of managed care, boosting benefit growth per enrollee. The share of workers covered by more restrictive HMOs has remained stable since 1998, while the share of those covered by preferred provider organizations has risen from 35 percent in 1998 to 41 percent in 2000. All of these activities led to faster growth in private health care spending than in previous years, when cost containment and managed care helped to dampen spending growth.

Prescription Drugs Spending Still Rising

Although hospital spending contributed more to net growth in overall health spending, spending on outpatient prescription drugs grew at a much faster rate. Growth in prescription drug spending slowed from 1999 to 2000, but drugs were still the fastest-growing service in 2000. Spending on prescription drugs grew 17.3 percent in 2000, the sixth consecutive year of double-digit growth. Consumer spending for outpatient prescription drugs represented the largest single component of out-of-pocket spending - 20 percent. The rapid rise in outpatient drug spending is due to increased direct-to-consumer advertising, more coverage by private health insurers, and newer drugs in the market.

Other report highlights:

•Enrollment in the State Children's Health Insurance Program (SCHIP) grew 70 percent in fiscal year 2000, from 1.9 million to 3.3 million. Total SCHIP spending increased to $2.8 billion in 2000, up from $1.8 billion in 1999.
•Medicaid spending grew 8.3 percent in 2000, rising to $202 billion, from $186 billion in 1999. A portion of the increase is due to upper payment limit payments that primarily affected hospitals and nursing homes.
• Medicare spending rose 5.6 percent in 2000, to $224.4 billion from $212.6 billion in 1999.
• After spending growth slowed between 1995 and 1999, payments for nursing home care rebounded in 2000. Spending rose 3.3 percent to $92.2 billion.
• Medicare spending for home health care rose 0.8 percent in 2000, the first positive growth in four years.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research. Copies of the January/February 2002 issue will be provided free to interested members of the press. To obtain a copy, or to get an advance copy of this article, contact Jackie Graves at Health Affairs, 301/656-7401, ext. 255, or via email, press@healthaffairs.org. Selected articles from the January/February issue are available free on the journal's Web site, www.healthaffairs.org.


©2002 Project HOPE–The People-to-People Health Foundation, Inc.