1. Providing Insights that Contribute to Better Health Policy Ten Things To Know About Health Care Cost Trends Bradley Strunk Presented to MCOL’s HealthWebSummit “New Directions in Managing Health Care Costs”

2. The Center for Studying Health System Change (HSC)  Independent, nonpartisan research on changes in the organization and delivery of care – and their impact on people  Funded exclusively by The Robert Wood Johnson Foundation  Primary research effort: Community Tracking Study (CTS)  Also conduct a health care cost tracking analysis annually  Synthesize public and private data series  Integrate findings from CTS site visits

3. Basis of This Presentation  Health Affairs “Web-exclusive” article on latest cost trends (available free of charge):  http://www.healthaffairs.org/WebExclusives/Strunk_Web_Excl_092502.htm http://www.healthaffairs.org/WebExclusives/Strunk_Web_Excl_092502.htm  HSC Data Bulletin on latest cost trends (essentially, an executive summary of web- exclusive article; also free):  http://www.hschange.org/CONTENT/472/ http://www.hschange.org/CONTENT/472/  For general information about HSC, visit our website at www.hschange.orgwww.hschange.org

4. Definition of “Cost”  Focus of this presentation is on health care costs that underlie private health insurance premiums – in other words, the expenditures that are incurred when someone uses the health care system; in this respect, health care costs can also be referred to as “claims” costs or “service use” costs  Term “spending” used interchangeably with “cost”  Health care cost/spending trends based on the Milliman USA Health Cost Index ($0 deductible)  See http://www.healthcostindex.com/ http://www.healthcostindex.com/

5. 1.Health Care Spending is Rising Very Rapidly  Per capita spending up 10% in 2001  Much larger than 1.4% increase in per capita GDP  Someone will be paying for this

6. 2001 Increase Was Largest in Over a Decade Source: Milliman USA Health Cost Index ($0 deductible)

7. 2.Increase in Spending On Hospital Care Increasingly Important to Overall Cost Trend in ‘01 16.3 13.8 10.0 7.1 6.7 Source: Milliman USA Health Cost Index ($0 deductible)

8. Share of Overall Cost Trend Accounted for by Each Category Prescription Drugs Physician Care Hospital Inpatient Hospital Outpatient Source: Milliman USA Health Cost Index ($0 deductible)

9. 3.Rising Hospital Spending Reflects Steeper Increases in Both Prices Paid to Hospitals and Use of Services  Prices rising for hospitals  Steeply rising hourly wages for hospital personnel  Hospitals have more leverage with health plans  Due to hospital consolidation  And consumers demanding broader networks  Rising use of services even more important  Service use up 8% in 2001  Reversal of trend on admission rate  Rising use of outpatient services

10. Trends in Hospital Price and Quantity Source: Hospital Price Index: U.S. Department of Commerce, Bureau of Labor Statistics’ PPI for Hospital Services; Hospital Quantity Index: calculated as the residual of the Milliman USA hospital spending trend and the trend in the PPI for Hospital Services. Note: the PPI for Hospital Services is for non-public payors and for general medical and surgical hospitals only.

11. 4.Key Short-term Cost Driver: Retreat From Tightly Managed Care  Easier access to specialists  Fewer prior authorization requirements  Less provider risk contracting, or “capitation”  Broader provider networks

12. 5.Aging Plays Limited Role in Health Care Cost Trends  Early 1990s: Aging’s effect is negligible  By 2001: Aging accounted for less than 10% of cost trend  Rest of this decade: Aging will remain a limited cost driver

13. Effect of U.S. Population Aging on Health Care Costs (Annual Percentage Change) Sources: Aging Index—calculated using data from the 1996 and 1997 MEPS and U.S. resident population estimates and projections of the under-65 population from the U.S. Census Bureau; Per Capita Non-Medicare Personal Health Care Expenditures—from the National Health Accounts, maintained by the Centers for Medicare and Medicaid Services. Actual EstimatesProjections

14. 6.General Economy Influences Health Care Cost Trends  Recent research: five year lag  Mechanism uncertain  Employer strategies important  During recessions, high cost trends driven by previous booms

15. 7.Advancing Medical Technology is the Dominant Long-term Driver of Cost Trends  Prominent studies: accounts for ½ to  of long- term trend in excess of general inflation  New procedures  New applications of old procedures  Many innovations that reduce unit costs generate increased volume  Ready acceptance is a key factor  Public expects new cures  Extensive third-party payment precludes costs from restraining technology

16. 8.Premium Trend is Higher Now Than Trend in Underlying Costs  Premium increase for 2002: 12.7 percent  Health insurance “underwriting cycle” (UC) plays important role  Health insurer profits now up sharply  The UC will turn – but not yet Source of premium data: Kaiser Family Foundation/Health Research and Educational Trust Employer Benefits Survey

17. 9.Shift to More Patient Cost Sharing Already Underway  Higher deductibles, coinsurance, copayments  Cost of coverage increased 2-3% in excess of premiums in 2002  Tiered provider networks  Consumer-driven plans

18. 10.Potential for Some Slowing of the Overall Cost Trend  Trend declined to 8.8% through first six months of 2002  Potential factors  Increased patient cost sharing  Completion of transition to looser managed care  CMS projects a slowdown in private personal health care expenditure growth in 2003

19. Conclusions  Mid-1990s was a temporary hiatus from cost pressures  Financing system will force attention to the issue  Emphasis now on patient financial incentives  Approach vulnerable to backlash  Lack of alternatives will limit response