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September 30, 2002

Study: Increased hospital costs drove double-digit increase in health costs in 2002

Driven by increases in costs of hospital care, spending on health care jumped 10 percent in 2001, the first double-digit increase in more than a decade, according to a study by the Center for Studying Health System Change (HSC) published Sept. 25 on the Web site of the journal Health Affairs.

Spending on inpatient and outpatient hospital care climbed 12 percent in 2001, accounting for more than half, or 51 percent, of the overall health care spending increase, the article said.

This rapidly rising health care spending helped spark a 15 percent average increase in the cost of employer-sponsored health insurance in 2002, including a 12.7 percent premium increase and a 2 percent to 3 percent "benefit buy-down" by employers who reduced benefits and increased employee cost sharing, the report said.

"People are getting more tests and treatments as managed care plans abandon tight restrictions on care, but higher hospital prices are playing a role as well in rising costs," said Paul B. Ginsburg, president of HSC, a nonpartisan policy research organization funded exclusively by The Robert Wood Johnson Foundation.

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 determine long-term health insurance premium trends.

Growing use of services accounted for about two-thirds of increased spending on hospital care, with the other third coming from higher payment rates, the study found.

"Higher premiums are almost certainly going to result in more Americans becoming uninsured. More people will decide they can't afford health insurance, and some businesses, especially small firms, will drop coverage," Ginsburg said.

"Increased cost sharing means people will pay more when they go to the doctor or fill a prescription," Ginsburg said. "Giving consumers more of a financial stake in their care can raise awareness about costs and encourage more responsible health care choices, but too much cost sharing can create barriers to needed care, especially for low-income people and people with chronic illnesses."

Employers did not raise the proportion of the total premium that employees are required to pay. In both 2001 and 2002, employees paid about 15.5 percent of the cost of single coverage and 27.3 percent of the cost of family coverage.

Early evidence from 2002 suggests overall health care cost trends may have peaked in 2001. Higher consumer cost sharing appears to be slowing demand for care, and much of the recent growth in utilization may be a one-time consequence of the retreat from tightly managed care. Through June 2002, compared with the same period in 2001, the increase in total spending per capita, while still high, slowed to 8.8 percent.

The study show shows that:

. Spending on outpatient hospital care grew 16.3 percent in 2001, accounting for 37 percent of the overall health care spending increase. Outpatient spending was the fastest growing component of overall spending, surpassing prescription drugs for the first time since 1995.

. Spending on inpatient care jumped 7.1 percent in 2001, accounting for 14 percent of the overall increase. Growing at almost three times the 2000 rate, inpatient spending continued a stunning reversal from 1997, when inpatient spending decreased 5.3 percent.

. Spending on prescription drugs rose 13.8 percent, slowing for the second year in a row and contributing 21 percent to the overall spending increase.

. Spending for physician services increased 6.7 percent, accounting for 28 percent of the overall spending increase.

. Hospitals are facing significant financial pressures from rising payroll costs. Hospital payroll costs grew 8.6 percent in 2001-more than double the 3.7 percent increase in 2000-because of increases in both wage rates and hours worked. Hospitals are probably facing even steeper payroll increases because the study didn't capture increased costs for agency nurses and other workers who are contractors rather than employees.

The average hourly hospital wage grew 6.1 percent in 2001-nearly double the 2000 pace-providing evidence of the financial pressures on hospitals from the severe shortage of nurses and other skilled employees. Total hours worked by hospital workers also grew in 2001, up 2.4 percent compared with 0.4 percent in 2000, reflecting the increased use of hospital services.

The study is available online at www.healthaffairs.org.