Our paper in the Fall 1996 issue of

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1 Tracking Health Care Costs: An Update Do recent reports of premium increases portend health care costs on the rise again? by Pau l B. G ins burg an d Jeremy D. Pickreign Our paper in the Fall issue of Health Affairs documented the steep and unprecedented decline in the rate of increase in health care costs throughout the first half of this decade. 1 This pattern appeared in a variety of data used to evaluate whether the health care system is succeeding in containing costs. Recently the media have carried stories about health care costs heading upward again, based on anecdotal information that health plans have raised premiums. 2 This paper, which draws on a year of additional data from the sources that we have found most valuable, discusses recent developments and comments on the prospects for a substantial upturn in the rate of cost growth. We also discuss how cost trends have affected consumers. RECENT HEALTH SPENDING DATA Health spending data reported by providers suggest that the downward trajectory of the rate of increase in spending per capita leveled off in (Exhibit 1). Our expanded version of the Milliman and Robertson Health Cost Index shows a slight decline in the rate of growth from percent in to percent in. 3 In contrast, payroll costs by health care establishments (we show these Bureau of Labor Statistics data on a per capita basis to be comparable to the data on health spending) show a small increase in trend. Since general inflation (the gross domestic product [GDP] price index) was slightly lower in than it was in, the trend in real health care spending (as opposed to the nominal expenditures expressed in the exhibit) would show a slight upturn. Turning to components of health spending, the pattern for resembles that of the previous few years (Exhibit 2). 4 The rate of growth in spending for drugs continues to be much higher than those for hospital and physician services, but in it resumed a downward trend after increasing slightly in and. Among the components of payroll costs, the small upturn in the growth rate for comes equally from total hours worked per capita and the average hourly wage (Exhibit 3). But note that the increase in the average hourly wage in health care establishments was below that for all industries. The longstanding pattern of wage increases being higher in health care than in other industries ended in ; the result continues and perhaps expands this important departure from past trends. INSURANCE PREMIUMS Recent attention to health care cost trends has focused on premiums for private health insurance. According to KPMG Peat Marwick s survey of employers, premium increases continued their decline in, increasing by less than 1 percent (Exhibit 4). This rate of increase did not vary greatly by 151 Paul Ginsburg is president of the Center for Studying Health System Change in Washington, D.C. Jeremy Pickreign is a research analyst there The People-to-People Health Foundation, Inc.

2 EXHIBIT 1 Annual Change Per Capita In Health Care Expenditures, Year National health expenditures a 11.0% e Expanded health cost index b 10.9% Payroll: health services establishments c 10.0% Chain-type GDP price index d 4.3% SOURCES: See below. NOTE: GDP is gross domestic product. a From the National Health Accounts database at the Health Care Financing Administration, National Cost Estimates Unit. Reflects recent revisions published in March b Calculations by the authors using data from Milliman and Robertson s Health Cost Index database, expanded to include Medicare. c From U.S. Department of Labor Bureau of Labor Statistics, Employment, Hours, and Earnings database. Payroll calculated as the product of production workers, average hours per week, and average hourly wage. d Obtained from the U.S. Department of Commerce, Bureau of Economic Analysis. e Not available. 152 type of health plan; rates of change ranged from a decrease of 0.4 percent for health maintenance organizations (HMOs) to an increase of 0.6 percent for preferred provider organizations (PPOs) and 1.2 percent in conventional insurance plans and point-of-service (POS) plans. The very low increase for conventional plans continues to puzzle us. The possible rationales spillover effects from managed care, incorporation of managed care techniques into conventional plans, and increases in Medicare payment rates slowing increases in charges to conventional insurers continue to be the most plausible candidates. Increases in premiums for private insurance were well below increases in underlying costs in. Exhibit 4 compares the premium increases for all plans to the Milliman and Robertson Health Cost Index, which is designed to reflect cost increases faced by private insurers. (Note that in contrast to Exhibits 1 and 2, this is the actual index, not our adaptation to include Medicare.) Although cost growth appears to have stabilized in, premium increases continued to fall through. Other surveys, such as the one by Hay-Huggins (discussed in our Fall paper), suggest that was also a year in EXHIBIT 2 Annual Change Per Capita In Health Care Expenditures, By Component, Year Total health Hospital Physician Drug 10.9% % % % SOURCE: Authors calculations using data from Milliman and Robertson s Health Cost Index database, expanded to include Medicare. H E A L T H A F F A I R S ~ V o l u m e 1 6, N u m b e r 4

3 EXHIBIT 3 Changes In Employment, Hours, And Earnings In Health Services Establishments, Year Payroll per capita a 10.0% Hours worked per capita b 3.9% Average hourly wage 5.9% SOURCE: U.S. Department of Labor, Bureau of Labor Statistics, Employment, Hours, and Earnings database. a Product of hours worked and average hourly wages adjusted for changes in population. b Product of total production workers and average hours per week of production workers. Average hourly wage (all industries) 3.7% which premium increases were below the underlying growth in costs per capita. n INSURERS PROFITABILITY. This difference implies that insurers profit margins are dropping a development that Wall Street has followed closely. In fact, the proportion of publicly traded HMO companies that are profitable declined from 90 percent in to 35 percent in. 5 This phenomenon is more a reflection of the intense competition in insurance markets than of the traditional underwriting cycle. Site visits conducted by the Center for Studying Health System Change have found purchasers bargaining more aggressively with health plans and switching plans more readily if necessary to get a lower premium. 6 But at some point, insurers will no longer be willing to raise premiums less than the increase in underlying costs, even if this means 153 E X H I B IT 4 Changes In Private Health Insurance Premiums And Health Care Costs, Annual percent increase Private health insurance premiums a Health care costs b SOURCES: See below. a KPMG Peat Marwick, Health Benefits in (Montvale, N.J.: KPMG Peat Marwick, ). b Milliman and Robertson s Health Cost Index database. Data are not expanded to include Medicare.

4 154 sacrificing market share. This makes the anecdotal information that 1997 premium increases are in the 4 to 5 percent range plausible. Whether health plans are able to restore their margins through premium increases that exceed the rate of underlying cost increases or only maintain them at current levels will depend on factors such as the degree of concentration in insurance markets and the priority given by purchasers to containing costs. n EMPLOYEE COST SHARING. Employers success at obtaining much lower rates of premium increases has been of limited benefit to employees. Employers have increased the share of premiums that must be contributed by employees especially for conventional plans. Thus, over the period, the dollar contributions of employees enrolled in employment-based insurance plans increased at an average annual rate of 7.2 percent, compared with premium increases that averaged 3.8 percent (Exhibit 5). The difference was greatest for those employees continuing in conventional plans; their contributions increased at a rate of 10.7 percent per year, whereas premiums for those plans increased by only 4.3 percent. At the other extreme, employees enrolled in PPOs found their contributions rising more slowly than premiums, as some employers altered their formula to encourage employees to shift from conventional plans. Thus, how consumers with employment-based health insurance see trends in health care costs will depend to a large extent on the type of health plan they have. One can only speculate about how employers will respond to higher rates of increase in premiums. Will they increase employee contributions even more to avoid absorbing increases into their cost structure? Or will they back off on shifting these increases to employees to keep a lid on what employees must pay? CONCLUSION Although private insurance premiums may head up in the future, it is important to distinguish this from increases in the underlying rate of growth of health care costs. Cost trends for suggest a very low rate of increase. Although some are predicting an up- E X H I B IT 5 Changes In Employer Premiums And Employee Contribution Amounts, By Plan Type, Annual percent increase Employee contribution amount Employer premium All employerbased plans Conventional HMO PPO POS SOURCE: KPMG Peat Marwick, Health Benefits in (Montvale, N.J.: KPMG Peat Marwick, ). NOTES: HMO is health maintenance organization. PPO is preferred provider organization. POS is point-of-service. H E A L T H A F F A I R S ~ V o l u m e 1 6, N u m b e r 4

5 turn in the rate of increase for 1997, the upturn envisioned is modest and in no way portends a return to the rates of the 1980s. The key forces th at led to the decline in cost growth purchasers shift from bill-paying to purchasing health plans and willingness to change plans for lower premiums are still in place. Those looking only at changes in premiums could be misled about the behavior of underlying health services costs. An important factor to keep in mind is that health care cost trends reported by providers tend to lead private health insurance premiums by about eighteen months. The lag comes from the time necessary to collect and analyze claims data and establish and quote premiums to purchasers and from the fact that rates stay in effect for twelve months. This means that any upturn in the rate of growth in premiums for 1997, and to a lesser extent 1998, will be driven not by a possible upturn in the trend of underlying costs, but rather by insurers attempts to increase their profit margins. While no less painful for those who have to pay the higher premiums, increases driven by restoration of profit margins have different longer-term implications than increases driven by increases in underlying costs. The authors are grateful to Peter Reilly of Milliman and Robertson for providing access to data and helpful comments. The paper was presented at Health Care Costs: Will They Start Rising Rapidly Again?, a conference sponsored by the Center for Studying Health System Change, Washington, D.C., 10 April This work was supported by The Robert Wood Johnson Foundation. NOTES 1. P.B. Ginsburg and J.D. Pickreign, Tracking Health Care Costs, Health Affairs (Fall ): The technical discussion in the fall paper, concerning the choice of data to track and its validation, is not repeated here. This paper focuses on, and we report data from a shorter period and give less emphasis to national health expenditure data, which were not yet available at the time of this writing. 2. Press coverage appears to have been stimulated by a preface to Foster Higgins National Survey of Employer-Sponsored Health Plans: Report/ (New York: Foster Higgins, ), by John Erb. Although the report itself documents continued low premium increases for, the preface describes a series of factors that could push up costs. No systematic data for 1997 have appeared to date. 3. The Milliman and Robertson Health Cost Index is designed to indicate to private insurers the trends in claims that they should expect for a standard policy that does not change over time. The index excludes Medicare spending so as to better reflect the expenses faced by private insurers. Since we use the index to reflect spending in the entire health care system, we offset these adjustments with data to expand the applicability of the index. 4. The fall paper used the series on national health expenditures that is part of the National Health Accounts database for the discussion of components. But since this update focuses heavily on and these data are not yet available for that year, we instead use our adaptation of the Milliman and Robertson Health Cost Index. 5. Geoffrey Harris, managing director, Smith Barney, comment at Profits, Patients, and Health System Change: A Wall Street Perspective, a conference sponsored by the Center for Studying Health System Change, Washington, D.C., 21 March D.J. Lipson and J.M. De Sa, Impact of Purchasing Strategies on Local Health Care Systems, Health Affairs (Summer ):