Tracking Health Care Costs:

Inflation Is Back

November/December 2000
Health Affairs, vol.19, no.6 (November/December 2000): 217-223
Christopher Hogan, Paul B. Ginsburg, Jon R. Gabel

rends in health care spending that underlie health insurance premiums affect the affordability of health care and the future of employer-sponsored health insurance, that is, employers' decisions to offer insurance and employees' ability to purchase it. As a result of data gleaned from a variety of sources, the authors note that a return to higher rates of premium growth was inevitable, and they show how the relationship between recent trends in medical spending and premiums reflects the health insurance underwriting cycle.

There are four major trends: provider revenues increased 6.6 percent in 1999, compared with 5.1 percent in 1998, mainly because of sharply higher drug spending; hospital inpatient revenues accounted for only 3 percent of the 1999 increase, due mostly to the continuing pattern of falling hospital revenues; spending for physician services accounted for 32 percent of the 1999 increase, due to the pullback from intensively managed care; and spending for hospital outpatient services represented 21 percent of the 1999 increase.

The sharp increase in premiums for 2000 (8.3 percent compared with 4.8 percent in 1999) was the result of discrepancies between cost and premium growth, as well as the behavior of the health insurance underwriting cycle. This marks the first year since 1994 that premium increases exceeded spending, which resulted in higher underwriting profits, thereby attracting capital into the health insurance industry. Even so, premiums rose more slowly than spending.

The authors believe that insurers may now be entering the next phase of the underwriting cycle. If the premium increase outstrips cost growth, the industry may become more profitable. Moreover, comparing premium increases for self-insured and fully insured plans reveals a trend of some employers to self-insure, which in turn stimulates a shift toward PPO plans and away from HMOs and point-of-service plans.

According to the authors, the future will bring steep growth in spending for medical services, as well as a sharp increase in costs and premiums. However, the double-digit increases of the past dozen years are not likely to return. Today's health care markets are far more competitive than they were in the past, and price pressures on providers will likely lead to continuing efforts to cut costs.

Free access to this article is available at the Health Affairs Web site.