Center for Studying Health System Change

Reprieve from Faster-Growing Health Care Spending Stalled in 2004

Health Affairs Study Shows Prescription Drug Spending Growth Slowed for Fifth Year in a Row

News Release
June 21, 2005

FURTHER INFORMATION, CONTACT:
Alwyn Cassil (202) 264-3484 or acassil@hschange.org

WASHINGTON, DC—The reprieve from faster-growing health care costs stalled in 2004 as costs per privately insured American grew 8.2 percent—virtually the same rate of increase as in 2003, according to a study by the Center for Studying Health System Change (HSC) published today as a Web-exclusive article in the journal Health Affairs.

Health spending growth continued to outpace overall economic growth by a wide margin—2.6 percentage points—in 2004, despite a robust 5.6 percent increase in the overall U.S. economy as measured by per capita gross domestic product, the study found. After peaking at 11.3 percent in 2001, health care spending growth slowed in 2002 and 2003 but now has leveled off at a relatively high rate.

"If health care spending continues to grow at a significantly faster rate than workers’ incomes—and there’s every sign that it will—health insurance will become unaffordable to more and more people," said Paul B. Ginsburg, Ph.D., coauthor of the Health Affairs study and president of HSC, a nonpartisan policy research organization funded principally by The Robert Wood Johnson Foundation.

Although underlying health spending growth stabilized, the slowdown in employer-sponsored health insurance premium growth continued. In 2005, estimated average premium increases ranged from 8 percent to 10 percent, down from an average 12 percent in 2004.

For the fourth year in a row—although to a lesser degree than in recent years—employers in 2005 increased patient cost sharing, through higher deductibles, copayments and coinsurance, as a way to cope with high premium increases.

"Employers appear either to have reached what they consider the limits of acceptable patient cost sharing or to feel less pressure to shift costs to employees in light of the improving economy and recent decline in the premium trend," said Bradley C. Strunk, an HSC researcher and study coauthor, along with John P. Cookson of Milliman Inc.

Trends in four of the five spending categories—inpatient and outpatient hospital care, physician services, and other services—stabilized in 2004, while prescription drug spending grew at a slower rate for the fifth year in a row. Key findings include:

• Prescription drug spending per privately insured person increased at a slower pace, growing 7.2 percent in 2004—compared with 8.9 percent in 2003 and less than half the 1999 peak increase of 18.1 percent. The slowdown in 2004 was largely a result of slower growth in drug prices (3.3%) rather than changes in the growth of drug utilization (3.8%). Prescription drug spending accounted for 21 percent of the overall total spending increase in 2004.
• Spending on inpatient hospital services increased 6.2 percent in 2004, essentially unchanged from the 6.1 percent increase in 2003. Spending on outpatient care increased 11.3 percent—keeping it the fastest growing category of health spending for the fourth year in a row—compared with 11.1 percent in 2003. The outpatient hospital category includes spending for services provided in freestanding facilities, such as surgery centers and imaging centers. Taken together, spending growth on inpatient and outpatient care accounted for 54 percent of the total increase in health spending in 2004.
• After slowing sharply in 2003, the hospital utilization trend increased somewhat in 2004, growing 2.9 percent. But hospital price growth—for inpatient and outpatient care combined—slowed for the first time in seven years in 2004, albeit at a relatively high rate of 7 percent.
• Spending on physician care increased 6.4 percent in 2004, identical to the 2003 growth rate. There was a small decline in the growth rate for use of physician services, while growth in prices for physician services increased slightly. Growth in spending on physician services accounted for 24 percent of the total increase in spending growth
• Spending on other types of services-most notably home health care and ambulance services-grew 6 percent in 2004 and accounted for about 2 percent of the overall increase in spending growth.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research 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 principally by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.

Health Affairs, published by Project HOPE, is the leading journal of health policy.