Center for Studying Health System Change

Contrary to Expectations, Health Care Costs, Insurance Premiums Rise Only Slightly in 1997-1998

News Releases
September 14, 1998

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ASHINGTON, D.C. -- Predictions that health costs will rise significantly have not yet come to pass. According to a new study released today in the journal Health Affairs, lower than anticipated rates of increase in provider revenue and health care payrolls in recent years produced a modest hike in health costs between 1996 and 1997. The authors say this appears to be continuing in 1998.

The study, conducted by Paul Ginsburg, president of Health System Change, and Jon Gabel, director of KPMG Peat Marwicks’ Center for Survey Research, is based on data from KPMG Peat Marwick, Milliman and Robertson, and the U.S. Labor Department. It incorporates the most recent information on cost trends, including 1998 private insurance premiums, 1997 provider revenues, and 1997-1998 health service payroll figures. The study examines private sector spending only and covers the period 1997-1998 (See Data Bulletin #13 for graphs and additional information on the study).

Ginsburg’s and Gabel’s analysis shows that employer-based health insurance premiums grew only 3.3 percent in 1998, well below the five-to-seven percent rates analysts projected just months ago. They found that premium increases were relatively uniform among health plans, ranging from 2.9 percent for HMOs and point of service plans (POS) to 3.8 percent for preferred provider organizations (PPOs). KPMG survey data show that deductibles for conventional and in-network PPO and POS services are lower today than in 1994.

Consumers Benefit From Slow Growth in Health Care Costs

According to the study, the lower rates of growth in health insurance costs is good news for consumers. Two significant trends identified by the study are the fact that employee premium contributions are now declining and out-of-pocket spending is decreasing.

"That’s a change from a few years ago, when employers were asking employees to contribute more of their share of the premium," Gabel says. That trend reversed or at least leveled off in 1995 and 1996. Since then, the study authors say, "employee contributions to coverage have grown more slowly than premiums." In fact, contrary to most assumptions, Ginsburg and Gabel say their analysis shows that employee contributions have been "declining" over the past three years. They note that factors contributing to this new pattern may be employers delayed reaction to the slowdown in premium growth and tightening labor markets.

The study credits the shift to managed care as partially responsible for a decrease in out-of-pocket spending. According to an analysis of data from the U.S. Labor Department, out-of-pocket spending for medical care was 9 percent lower in 1995 than in 1990. "These low trends in out-of-pocket spending may be attributable to rapid shifts from conventional coverage to managed care," Ginsburg says, noting that switching to an HMO can reduce a consumers’ out-of-pocket responsibility substantially.

Continued low profit margins for insurers could accelerate a rise in premiums in 1999, the authors warn. But the dominant driver of higher premiums will be underlying costs, they add. An acceleration of health costs could be triggered by a rapid introduction of new drugs or other costly technologies. Health costs also could rise more quickly if health insurers have increased difficulty reaping the deep discounts from providers that they have been able to elicit in past years.

Ginsburg and Gabel, however, expect that the rise in health costs will be held down by other factors, including wider use by providers of information about what constitutes best practices, growing application of secondary prevention measures, continuing excess capacity in the market that will make providers compete for business, and continuing demands by health care purchasers for low cost care.