Human Capital & Careers

Health-Care Inflation Slowing

The cooling down of expenses reflects a sharp falloff in the growth of hospital use, according to a report.
Stephen TaubJune 14, 2004

By many accounts, the pace of health insurance premium hikes is slowing slightly. One likely reason? Medical-cost inflation is cooling down a bit.

To be sure, medical costs climbed 7.4 percent in 2003, thanks to a steep rise in hospital prices. But that’s way off from the 9.6 percent increase racked up in 2002, according to a report by the non-profit Center for Studying Health System Change.

The expense slowdown reflected a sharp deceleration in growth of hospital use, even as growth in hospital prices speeded up for the sixth year in a row, the organization added.

The slackening of cost rises might flow from a slowdown in a growth trend in health-care spending that’s been going on for several years now. Total health-care spending per privately insured person rose 7.4 percent in 2003, which was 2.1 percentage points lower than the 2002 increase of 9.5 percent. This, in turn, was slightly lower than the 2001 increase of 10 percent.

Nearly three years of decelerating cost trends have followed “a steep acceleration during 1996 to 2001,” according to the report. Nevertheless, the cost trend remains high by historical standards and continued to outpace U.S. economic growth by a sizable margin, the group says.

With per capita gross domestic product (GDP) increasing 3.8 percent in 2003, the gap between it and the trend in health care spending remained larger than the average 2.5-percentage-point gap over the past 30 years, the report noted.

Still, the deceleration of the overall spending trend stems from decelerating trends across all four spending categories tracked by the center: outpatient and inpatient hospital care, prescription drugs, and physician care.

Spending on hospital outpatient care per privately insured person rose 11 percent last year, making it the fastest-growing spending category. This increase was 1.9 percentage points lower than the 2002 increase of 12.9 percent, however, and 3.6 percentage points lower than the increase in 2001, when the trend for outpatient spending peaked at 14.6 percent, according to the study.

The growth in spending on hospital inpatient services per privately insured person, was slower, rising 6.5 percent in 2003. That was 1.9 percentage points lower than the 2002 increase of 8.4 percent, signaling a turnaround from a period of rapidly accelerating growth in inpatient spending that began in 1998 following a 5.3 percent decline in 1997.

Altogether, growth in spending on inpatient and outpatient hospital care accounted for 53 percent of the total increase in health-care spending.

Payouts for prescription drugs per privately insured person grew by 9.1 percent in 2003, according to the study. That was a marked slowdown from the 2002 increase of 13.2 percent and less than half the increase in 1999, when the drug-spending trend peaked at 18.4 percent. After emerging as a major source of cost growth during the second half of the 1990s, the expense trend in pharmaceuticals has now decelerated for four straight years. The share of total spending growth attributable to increased drug spending is now at 20 percent, the report noted.

Spending on doctor care per privately insured person — the slowest-growing category of health spending for a while now — rose 5.1 percent in 2003, compared with 6.5 percent in 2002. The slowing is likely another reflection of the end of the transition to looser forms of managed care, according to the center.