Health Care Spending Growth Slows Sharply in First Half of 2003

Declining Cost Trend Opens Door for Health Insurance Premium Trend Slowdown in 2004

News Release
Dec. 12, 2003

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ASHINGTON, D.C.—Health care spending growth per privately insured American slowed in the first half of 2003, increasing 8.5 percent, a sharp drop from the 10 percent increase in the second half of 2002, according to a Center for Studying Health System Change (HSC) study released today.

The 1.5 percentage point decline in health care spending growth in the first half of 2003 was the largest six-month drop since the early 1990s. Nonetheless, health care spending in the first six months of 2003 grew nearly three times faster than growth in the overall economy, as measured by 2.9 percent growth in per capita gross domestic product (GDP) during the same period.

"Increased patient cost sharing is probably an important factor in the slowing of cost trends, but few experts expect this tool to substantially lower cost trends over the long term," said Paul B. Ginsburg, Ph.D., coauthor of the study and president of HSC, a nonpartisan policy research organization funded exclusively by The Robert Wood Johnson Foundation.

"Without more effective cost-control measures, the rising cost of health insurance will make coverage unaffordable to more and more Americans," Ginsburg said.

While other research shows employer-sponsored health insurance premium increases reached a 13-year high in 2003, rising an average 13.9 percent, the significant slowing of underlying health cost trends in 2003 could prompt the first slowdown since the mid-1990s in premium growth next year.

"Health spending is trending down, but it's still rising at a high rate, and while the premium trend should decline, average premium increases are still likely to be in the double digits in 2004," said Bradley C. Strunk, an HSC research analyst and study coauthor.

The study analyzes per capita spending on health care services—inpatient and outpatient hospital care, physician services and prescription drugs—commonly covered by private insurance. Per capita health care spending trends—also often referred to as cost trends—are important because they largely determine future health insurance premium trends. The study's findings are detailed in a new HSC Data Bulletin—Tracking Health Care Costs: Trends Slow in First Half of 2003—available by clicking here.

The slowing of the overall cost trend reflected slower growth in all four categories of health care spending. Prescription drug spending growth slowed the most, rising only 8.5 percent in the first half of 2003, or nearly 5 percentage points less than the 13.4 percent increase in the second half of 2002. Moreover, the first half of 2003 represented the first time since the mid-1990s that the drug trend did not grow at double-digit rates.

Spending on hospital inpatient care grew 7.6 percent during the first half of 2003, down from the 8.3 percent increase in the last six months of 2002. Spending on outpatient care increased 12.9 percent in the first half of 2003, down from 14.1 percent in the second half of 2002. Outpatient care remains the fastest growing category of health care spending. Spending on physician services increased 6.1 percent during the first half of 2003 and was again the slowest growing category of health care spending.

For inpatient and outpatient hospital care, price and utilization trends are heading in opposite directions. After rising steadily but relatively slowly between 1997 and the first half of 2002, the hospital price trend accelerated sharply in the latter half of 2002 (6.2%) and first half of 2003 (8.0%).

Over the past few years, hospital compensation cost increases—in response to a worker shortage—have created cost pressures for hospitals. For example, the hourly cost of compensating nurses grew by 8.8 percent during 2002, which was 3.5 percentage points greater than the increase in 2001 and 6.6 percentage points greater than the average increase from 1995 to 2000. Growth in compensation costs for nurses slowed somewhat during the first six months of 2003 but remained high by historical standards. Since hospitals often have multiyear contracts with health plans, these compensation increases will contribute to higher price trends in the future.

In contrast to the accelerating hospital price trend, the hospital utilization trend, which is calculated as a residual, slowed markedly, growing just 2.5 percent in the first half of 2003, down from 5 percent in the latter half of 2002. The slowdown in the hospital utilization trend likely reflects the effect of increased patient cost sharing for hospital services and the completion of the transition to more loosely managed care.

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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.