National health expenditures in

Transcription

1 National Health Expenditures In 1997: More Slow Growth Increases in out-of-pocket spending and spending on prescription drugs are the only blemishes on 1997 s placid panorama of health spending control. b y K a t h a r i n e L e v i t, C at h y Co wa n, B r a d l e y B r a d e n, Je a n S t i l l e r, A r t h u r S e n s e n i g, a n d H e l e n L a z e n b y National health expenditures in the United States amounted to $1.1 trillion in 1997, with per capita spending measured just shy of $4,000 (Exhibit 1). Health spending as a share of gross domestic product (GDP) fell slightly to 13.5 percent, the smallest claim of health spending on the nation s resources in the past five years. For slow health spending growth combined with solid increases in GDP halted the steady upward path of health spending as a share of GDP that has been observed over the past three decades. The pace of health spending increases has steadily slowed since 1990, when it reached its high of 12.2 percent. Health spending growth was only 4.8 percent in 1997, the slowest rate in more than three and a half decades. This trend reflects the nexus of several factors: the movement of most workers insured for health care through employer-sponsored plans to lower-cost managed care; low general and medical-specific inflation; and excess capacity among some health service providers, which boosted competition among providers to be included in managed care plans and drove down prices. These factors laid the foundation on which the recent transformation within the health care marketplace has been sustained. National health spending for 1997 portrays a relatively tranquil scene, with overall health care spending rising at unprecedented low rates, thanks to continuing slow private-sector growth and decelerating growth in public-sector spending. The share of health spending financed from public and private sources inched closer together in 1997, continuing the trend begun in Private funding paid for 53.6 percent of health care ($585.3 billion), down from 59.5 percent in 1990; public programs funded 46.4 percent ($507.1 billion), up from 40.5 percent in Although growth in public spending still exceeded private spending growth in 1997, growth differences between these two payer sectors narrowed to one percentage point, down from a differential of 7.4 percentage points as recently as HEALTH SPENDING In 1997 personal health care spending reached $969 billion, accounting for 89 percent of overall health spending. Per capita spending for personal health care goods and services grew at a 3.9 percent average annual rate from 1995 to 1997 (Exhibit 2). Growth can be divided into three measurable factors: economywide inflation as measured by the GDP chaintype price index, medical price inflation beyond economywide inflation ( excess medical inflation), and a residual that includes changes in volume and intensity of 99 The authors are economists and health insurance specialists in the National Health Statistics Group, Office of the Actuary, at the Health Care Financing Administration. They are part of a thirteen-member team that produces the National Health Expenditures series each year. H E A L T H A F F A I R S ~ N o v e m b e r / D e c e m b e r

2 EXHIBIT 1 National Health Expenditures, Aggregate And Per Capita Amounts, And Share Of Gross Domestic Product (GDP), Selected Calendar Years National health expenditures (billions) $26.9 $73.2 $247.3 $699.4 $947.7 $993.7 $1,042.5 $1,092.4 Health services and supplies Personal health care Hospital care Physician services Dental services Other professional services Home health care a Drugs and other medical nondurables Prescription drugs Vision products and other medical durables Nursing home care a Other personal health care Program administration and net cost of private health insurance Government public health activities Research and construction Research b Construction National health expenditures per capita Population (millions) $ $ $1, $2, $3, $3, , $3, , $3, GDP, billions of dollars $527 $1,036 $2,784 $5,744 $6,947 $7,270 $7,662 $8,111 National health expenditures as percent of GDP 5.1% 7.1% 8.9% 12.2% 13.6% 13.7% 13.6% 13.5% SOURCES: Health Care Financing Administration, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis; and the Social Security Administration. NOTES: Major revisions were introduced into expenditure estimates this year, including a new data source (IMS) for estimating prescription drug spending in and revised Census Bureau Services Annual Survey data for for physician services. Numbers may not add to totals because of rounding. a Freestanding facilities only. Additional services of this type are provided in hospital-based facilities and counted as hospital care. b Research and development expenditures of drug companies and other manufacturers and providers of medical equipment and supplies are excluded from research expenditures and instead are included in the category in which the product falls. services and any measurement error. 1 During the 1970s and early 1980s economywide inflation was a driving force in per capita spending growth. By the early 1990s excess medical inflation began to subside as the prominence of managed care grew. Managed care s tough stance in negotiating discounts with providers and excess capacity in some provider sectors gave insurers more control over price growth. In the most recent period ( ) growth in economywide inflation continued to decelerate, while growth in excess medical price inflation became almost negligible. However, growth in the nonprice factors such as volume and intensity of service use per capita continued at essentially the same rate. Compared with the 1980s, growth in managed care enrollment in the 1990s appears to have had only a small dampening effect on the volume and intensity of service use. Spending for hospital and physician services traditionally accounts for the majority of H E A L T H A F F A I R S ~ V o l u m e 1 7, N u m b e r 6

3 Average annual percent change Economywide prices "Excess" medical prices a Residual (volume and intensity) Calendar years SOURCE: Health Care Financing Administration, Office of the Actuary, National Health Statistics Group. NOTES: Economywide inflation is calculated using the gross domestic product (GDP) chain-type price index. Medical inflation is calculated using the personal health care (PHC) chain-type index constructed from the producer price index for hospital care, nursing home input price index for nursing home care, and consumer price indices specific to each of the remaining PHC components. a Excess denotes the amount of inflation beyond economywide inflation. 101 personal health care spending. However, in recent years the percentage being spent on these services has been declining. Growth in spending for home health care provided by freestanding agencies also decelerated, as a result of public-sector actions to rein in the extraordinary growth in spending for that care. Prescription drug spending grew at doubledigit rates during the past few years because of the large number of new, higher-price drugs entering the market, rising consumer demand induced by drug manufacturers advertising, and an increase in prescriptions filled. n HOSPITAL CARE. In 1997 spending for inpatient and outpatient hospital services continued to dominate health care spending by accounting for 38 percent of personal health care, or $371 billion. Spending for hospital care grew only 2.9 percent in 1997, slower than spending for any other personal health care service (Exhibit 3). This trend was driven by steadily decelerating spending for inpatient services in community hospitals over the past five years, culminating in a slight decline in 1997 (down 0.3 percent). 2 The continued migration of persons with employer-sponsored insurance, Medicare, and Medicaid into managed care plans, along with rapid development of treatments deliverable in ambulatory settings, have caused slow spending growth in the inpatient hospital setting. Insurers have developed incentives for providers to choose less expensive treatment in ambulatory settings and, for patients who are admitted, to reduce lengths of inpatient stays. Since 1990 these incentives have resulted in a 6 percent reduction in hospital admissions per capita and a 16 percent decline in inpatient days in community hospitals. 3 Continued technological developments, which transfer more procedures to outpatient settings, and development of hospital-based home health services have allowed outpatient community hospital spending growth to remain strong. Increasing at a steady 10 percent pace since 1993, growth in outpatient expen- H E A L T H A F F A I R S ~ N o v e m b e r / D e c e m b e r

4 EXHIBIT 3 National Health Expenditures, Average Annual Growth From Prior Year Shown, Selected Calendar Years National health expenditures 10.6% 12.9% 11.0% 7.9% 4.9% 4.9% 4.8% Health services and supplies Personal health care Hospital care Physician services Dental services Other professional services Home health care b Drugs and other medical nondurables Prescription drugs Vision products and other medical durables Nursing home care b Other personal health care Program administration and net cost of private health insurance Government public health activities Research and construction Research c Construction National health expenditures per capita Gross domestic product a SOURCES: Health Care Financing Administration, Office of the Actuary, National Health Statistics Group; and U.S. Department of Commerce, Bureau of Economic Analysis. NOTES: Major revisions were introduced into expenditure estimates this year, including a new data source (IMS) for estimating prescription drug spending in and revised Census Bureau Services Annual Survey data for for physician services. Numbers may not add to totals because of rounding. a Not available. b Freestanding facilities only. Additional services of this type are provided in hospital-based facilities and counted as hospital care. c Research and development expenditures of drug companies and other manufacturers and providers of medical equipment and supplies are excluded from research expenditures but are included in the expenditure class in which the product falls ditures has offset some of the slow growth in inpatient expenditures. As the demand for inpatient services has fallen, hospitals have closed staffed beds at a steady rate in an attempt to curtail costs. Since 1990, 88,000 staffed community hospital beds have closed a 10 percent reduction in inpatient capacity. Despite these closures and because of an even faster drop in inpatient days (down 16 percent), occupancy rates in community hospitals have fallen from 64.5 percent in 1990 to 59.6 percent in Excess inpatient capacity gave managed care plans leverage in negotiating lower prices for services as hospitals competed for inclusion as managed care providers. Decelerating utilization trends were compounded by this slowing hospital price growth, as reflected in the Producer Price Index (PPI) for hospital services. The PPI registered just 0.8 percent growth in the costs faced by hospitals in producing services in Despite falling utilization and decelerating price growth, hospitals overall have adapted financially to the new environment. Throughout the 1990s profit margins remained stronger than in almost any previous period. 6 Nearly all hospital expenditures were funded by third parties, a trend that has become more dominant over the decades. Medicare and Medicaid funded nearly half of all hospital expenditures in 1997, while private health insurance paid for another third; consumers directly paid for only 3 percent of all H E A L T H A F F A I R S ~ V o l u m e 1 7, N u m b e r 6

5 hospital services. 7 Since 1990 the share of hospital spending funded by private health insurance has fallen, as a larger portion of spending was diverted to ambulatory settings. Medicare spending for hospital services grew more than twice as fast (6.4 percent) as overall hospital spending (2.9 percent) in 1997 and 60 percent faster than overall hospital spending throughout the 1990s. Medicaid spending for hospital services dropped in 1997 (off 2.4 percent), probably as a result of growing managed care enrollment, the absolute decline in the number of Medicaid recipients, and restrictions placed on states disproportionateshare payments to hospitals. n HOME HEALTH. Home health care in national health expenditures is a measure of spending for home health care provided by freestanding establishments. Additional spending for services received in hospitalbased home health facilities is included with hospital expenditures. In 1997 expenditures for home health care delivered by freestanding facilities reached $32.3 billion. This is one of the smallest and, until recently, one of the fastest-growing national health spending components. Growth in spending for home health care has decelerated from 28.2 percent in 1990 to 3.7 percent in Because Medicare finances 40 percent of all home health services provided by freestanding facilities, steps to control Medicare spending contributed greatly to the overall spending slowdown. Recent controls include payment policy changes and fraud-and-abuse activities. In the early 1990s Medicare restrained growth in per visit payments. Effective October 1997, the Balanced Budget Act (BBA) changed Medicare payment rates for home health care by reducing Medicare per visit cost limits and by mandating payment of th e lowest of three possible payment amounts: actual cost, per visit limit, or an aggregate agency-specific per beneficiary annual limit. Medicare fraud-and-abuse detection activities also have contributed to slower growth in home health spending. These activities included a number of criminal proceedings and civil actions against certain home health agencies; efforts to curb fraud and abuse, Operation Restore Trust; and a moratorium on the licensing and certification of Medicare home health agencies between September 1997 and January In addition, intensified medical review efforts to curb fraud, waste, and abuse in Medicare home health claims led to increased claims denials and subsequent appeals by providers, which either were upheld or, at the least, may have resulted in payment delays. In 1997 more than half of spending for freestanding home health care facilities came from public sources (mostly Medicare). Medicaid financed an additional 14.7 percent, while private sources paid for 45.4 percent. n PHYSICIAN SERVICES. Spending for physician services was $218 billion in Spending increased 4.4 percent from the previous year, continuing a trend of single-digit growth that began in Again, managed care appears to be the reason for slow growth. Physicians involvement with managed care has increased over the past few years. In 1997, 92 percent of physicians had managed care contracts, up from 88 percent in For physicians with managed care contracts, 49 percent of their income was derived from these contracts, up from 44 percent in The increasing prevalence of managed care contracts has restrained the revenue growth of physician practices. Managed care organizations (MCOs) control growth in payments to physicians by negotiating discounts with physicians or through capitation. In 1997, 36 percent of physicians were in practices with at least one capitated contract, and these contracts accounted for 23 percent of revenue. 9 The majority of these physicians were expected to pay for ancillary services under these capitated contracts. MCOs attempts to control costs appear to be among the factors leading to lower growth in mean net income for all physicians. Average annual net income growth fell from 7.2 percent for to 1.7 percent for Growth in managed care has been a catalyst for change in physicians practices. Physi- 103 H E A L T H A F F A I R S ~ N o v e m b e r / D e c e m b e r

6 104 cians have reacted by expanding the size of their practices. By forming large group practices, physicians can offer a full range of services at the competitive prices needed to win contracts with managed care plans or with employers directly. These larger group practices also can benefit from increased negotiation leverage, economies of scale, and influxes of capital. Larger organizations also are more capable of bearing or dealing with risk inherent in capitated arrangements. As practice size increased, more physicians opted for employment, not self-employment. The number of employed physicians grew from 32 percent of all patient care physicians in 1992 to 43 percent in 1994 and The shift of physicians from self-employed to employed status contributed to slower growth in overall physician expenditures because employed physicians generally earn less income than self-employed physicians earn. 12 Despite the expectation that the need for primary care physicians would increase under managed care, there are several indications of oversupply. According to a national physician recruiting firm, recruitment of primary care physicians fell 17 percent, while recruitment of specialists went up 40 percent in Another recent study showed that residents finishing their training in primary care specialties in 1996 had difficulty obtaining employment or could only find part-time work. 14 Perceived oversupply also is indicated by the decline in the number of applicants to medical schools in 1997 (down 8 percent) and the falling number of persons taking medical entrance exams, an indicator of the future number of applicants. In 1997 students may have opted away from medical school because of the high cost of education, the uncertainty of physicians role in the managed care environment, and predictions of an oversupply of physicians in the near future. 15 n PRESCRIPTION DRUGS. In recent years spending for prescription drugs has grown much faster than spending for other types of health care goods and services. This is increasingly evident to third-party insurers in the form of soaring growth in claims for prescription drug purchases. Over the past couple of years health maintenance organizations (HMOs) in particular have pointed to growth in drug spending as a primary reason for poor financial performance. 16 Some contend, however, that drug use may be a less costly alternative to other medical services. Retail spending for prescription drugs amounted to $78.9 billion in Over the past several years spending has grown at double-digit rates: 10.6 percent in 1995, 13.2 percent in 1996, and 14.1 percent in Among the most important reasons for rapid growth in prescription drug spending were changes occurring in the sources of payment for prescription drugs. As recently as 1989 out-of-pocket payments accounted for a larger percentage (51 percent) of total drug spending than did third-party payments (49 percent). However, by 1997 the out-of-pocket share declined to 29 percent and the thirdparty share soared to 71 percent. The existence of third-party coverage increases the likelihood that patients will fill prescriptions, and the switch to managed care further compounds this trend. Although most medical plans have covered outpatient drugs for many years, the shift of plan subscribers from traditional fee-for-service plans to managed care plans lowers out-of-pocket requirements. 17 In traditional fee-for-service plans, typically the plan subscriber is responsible for all outpatient prescription drug charges until a deductible is reached. By contrast, HMOs require only a nominal copayment per prescription, typically $5 to $ The relatively low out-of-pocket costs of first-dollar coverage of prescription drugs in managed care plans may help to explain the recent growth in the use of drug benefits. Growth in the number of prescriptions dispensed, up 6.0 percent in 1995 and 4.2 percent in both 1996 and 1997, are well above historical rates of 2.0 percent. 19 This suggests that a large part of the recent rapid increase in pharmacy spending was due to growth in utilization, unlike in an earlier period in the 1980s, when sharp increases in drug spending were largely due to price increases. H E A L T H A F F A I R S ~ V o l u m e 1 7, N u m b e r 6

7 Some increases in drug use resulted from the number of new drugs introduced in recent years. The Food and Drug Administration (FDA) approved thirty-nine new drugs in 1997, second only to the all-time high of fiftythree new drugs introduced in New drugs typically are introduced at higher prices than those of existing drugs. Although new drugs released after 1992 accounted for only 16.8 percent of total 1997 utilization, they accounted for 30.6 percent of total 1997 costs. 20 The FDA is speeding new drugs into the marketplace at a record pace. FDA approval times are down, from 20.5 months in 1996 to seventeen months in Manufacturers are doing their part to induce the use of new, higher-price prescription drugs through direct-to-consumer advertisements, thereby contributing to the accelerating spending growth trend. Spending for such advertisements is projected to exceed $1.3 billion in 1998, a fourfold increase over 1994 spending ($0.3 billion). Physicians report large increases in the number of patients requesting specific brand-name drugs, one indication of the success of advertisements. 22 Most insurers have already felt the result of rapidly growing spending for prescription medicines, despite some insurers use of pharmacy benefit managers (PBMs) to control costs. 23 Drug benefits among private insurers have grown from 5.4 percent of premiums in 1990 to 11.4 percent in 1997; for Medicaid, spending grew from 6.7 percent to 8.3 percent of all payments. FUNDING SOURCES During the past decade influence over the health care delivery system has shifted substantially away from the providers of health care toward insurers and employers. With double-digit growth in health insurance premiums in the late 1980s and early 1990s, large employers began implementing new costcontrol strategies, such as inducing or requiring employees to switch to managed care, forming regional purchasing coalitions to negotiate with insurers, and contracting directly with health care providers. 24 To compete for employers business, insurers placed new demands on providers, such as negotiating more favorable charges for services, altering practice and payment incentives, developing and maintaining provider networks, and scrutinizing costs. 25 To maintain access to patients, providers were forced to accept this new managed care environment. This shift in health care marketplace leverage has occurred simultaneously with a dramatic deceleration in health spending growth. The overall slowdown in health spending has been driven largely by rapidly falling growth in private spending, which reached an all-time low growth rate of 2.3 percent in Since 1994 decelerating spending from public sources of funds, primarily spending for Medicare and Medicaid, has contributed to slower overall spending growth. n MEDICAID. Total Medicaid spending was $159.9 billion in 1997, an increase of 3.8 percent over the 1996 level. This is the slowest growth in spending since Medicaid s inception. Average annual growth in Medicaid spending decelerated to 5.9 percent over the period, compared with 12.7 percent for and 19.5 percent for The rapid growth over the period is attributable to three basic factors: (1) an increase in the number of Medicaid enrollees, (2) an increase in nominal spending per recipient, and (3) explosive growth in disproportionate-share hospital (DSH) payments. 26 In addition to low rates of economywide and medical-specific inflation, the slowdown in total Medicaid spending during is believed to be due to several factors. Preliminary data suggest that Medicaid enrollment decreased slightly in fiscal years 1995 and 1996 and more markedly in FY Growth in nominal spending per enrollee also decelerated, possibly because of the effects of managed care penetration, which rose from 9.5 percent of total Medicaid enrollment in FY 1991 to 47.8 percent in FY Section 1915(b) (freedom of choice) and Section 1115 waivers can make managed care enrollment mandatory for Medicaid recipients. 27 Increased use of waivers as states seek to pro- 105 H E A L T H A F F A I R S ~ N o v e m b e r / D e c e m b e r

8 106 vide less expensive alternatives to institutional long-term care may also lower average spending per recipient. In 1996 Congress passed welfare reform legislation that ended Aid to Families with Dependent Children (AFDC) and replaced it with Temporary Assistance for Needy Families (TANF). 28 Three provisions of the welfare reform legislation directly affect Medicaid eligibility by (1) breaking the link between welfare and Medicaid eligibility, although states must continue to provide benefits to persons who met the eligibility requirements in effect prior to passage of this legislation; (2) changing the definition of childhood disability under the Supplemental Security Income (SSI) program and potentially reducing the number of eligible children; and (3) curtailing benefits to legal immigrants and introducing a mandatory ban on Medicaid eligibility for qualified aliens admitted to the United States after 22 August (The BBA subsequently restored benefits to many of the persons affected by the latter two provisions.) Early indications are that many states continued to administer Medicaid as they did prior to welfare reform. 30 However, as states begin to use the flexibility built into welfare reform growth of the number of Medicaid-eligible persons is likely to decelerate. n MEDICARE. In 1997 Medicare financed $214.6 billion in spending for health care for its 38.4 million aged and disabled enrollees (Exhibit 4). Medicare is the largest public payer for health care. Annual growth in Medicare spending has slowed markedly from 12.2 percent in 1994 to 7.2 percent in This deceleration reflects, in part, slowing medical price increases, tightened legislated limits that restrain the growth in Medicare payments to providers, penalties in the form of stricter limits on the growth in physician fees imposed on physicians for exceeding the Medicare volume performance standards in 1994 and 1995, providers reaction to fraudand-abuse detection activities, and a small but steady deceleration in growth in the overall Medicare population. 31 The most dramatic deceleration in Medicare spending was for home health care furnished by freestanding home health agencies, which actually fell 3.0 percent in This decline compares with 10.3 percent growth in 1996 and continues a downward trend that began after 1990, when home health care recorded a growth rate of 50.1 percent. Growth in Medicare spending for nursing home care, which had slowed between 1992 and 1996, reaccelerated in 1997 to 26.3 percent. The relatively high growth in nursing home spending in 1997 may be related to increases in ancillary services, which are reimbursed on a reasonable cost basis. 33 To control costs, the BBA mandates that a prospective payment system be established for skilled nursing facilities (SNFs) and that all services be bundled into a single per diem amount. n PRIVATE HEALTH INSURANCE. Of the $585.3 billion spent by private sources for health spending in 1997, about 60 percent ($348 billion) was spent on private health insurance premiums. Since 1990 the growth in spending for private health insurance has decelerated markedly. In 1997 spending for private health insurance premiums grew just 3.2 percent, down slightly from the 4.0 percent growth of A large body of evidence suggests that a significant factor in the overall slowdown of premium growth in the 1990s has been the migration of employers and employees into managed care plans. 34 In 1997, 85 percent of the insured workforce was in some type of managed care plan. 35 The low growth in private health insurance premiums in 1997 was in contrast to the expectations of many industry analysts, who predicted that insurers would finally be forced to raise prices substantially in an effort to mitigate falling profit margins. 36 Because benefit payouts have risen more quickly than total premiums have for the past four years, operating margins for insurers have indeed been narrowing. In 1997 private health insurance paid for $313.5 billion in benefits, up 4.6 percent over 1996 and a full 1.4 percentage points higher than total premium growth. As the percentage of the premium paid out for health care benefits has risen, many insur- H E A L T H A F F A I R S ~ V o l u m e 1 7, N u m b e r 6

9 EXHIBIT 4 National Health Expenditures, By Source Of Funds, Amounts, And Average Annual Growth, Selected Calendar Years National health expenditures (billions) $26.9 $73.2 $247.3 $699.4 $947.7 $993.7 $1,042.5 $1,092.4 Private funds Consumer payments Out-of-pocket payments Private health insurance Other private funds Public funds Federal Medicare Medicaid Other federal State and local Medicaid Other state and local Average annual growth in national health expenditures from prior year shown 10.6% 12.9% 11.0% 7.9% 4.9% 4.9% 4.8% Private funds Consumer payments Out-of-pocket payments Private health insurance Other private funds Public funds Federal Medicare Medicaid Other federal State and local Medicaid Other state and local SOURCE: Health Care Financing Administration, Office of the Actuary, National Health Statistics Group. NOTE: Numbers may not add to totals because of rounding. a Not applicable. b Not available ers have sustained losses. 37 Competition for market share between health plans, as well as aggressive bargaining by employers to hold costs down, have managed to keep the cap on premium cost growth to date. n MEDICARE AND PRIVATE HEALTH INSURANCE: A COMPARISON. In 1997 aggregate Medicare spending grew four percentage points faster than private health insurance spending (7.2 percent, compared with 3.2 percent). Medicare and private health insurance benefits (personal health care expenditures) per enrollee actually have grown at comparable average annual rates from 1969 through 1997 (10.4 percent and 11.4 percent, respectively) (Exhibit 5). However, two periods marked significant growth differences in spending between the two funding sources. The first period was , when average annual growth in private health insurance spending per enrollee exceeded the Medicare rate by 4.5 percentage points. The second was , when average annual growth in Medicare spending per enrollee exceeded that of private health insurance spending by 5.2 percentage points. However, in the past two years Medicare per enrollee growth has been trending down, while private health insurance per enrollee growth has trended up, narrowing the gap to two percentage points by 1997 (5.8 percent for Medicare, compared with 3.8 percent for private health insurance). The recent disparity between aggregate growth rates has been cause for much concern H E A L T H A F F A I R S ~ N o v e m b e r / D e c e m b e r

10 108 by policymakers, who legislated changes in Medicare through the BBA to bring its cost growth more in line with that of the private sector. 38 The short-term disparities in the per enrollee growth rates in Medicare and private health insurance give way to longer-run equilibrium in the health care marketplace as a whole. Although short-run disparities will always exist, public and private payers are inexorably linked in a larger environment, each acting alone and then reacting to each other and to changes that occur in both the delivery and the costs of health services. n OUT-OF-POCKET SPENDING. Consumers out-of-pocket spending, $187.6 billion in 1997, includes spending for coinsurance and deductibles required by insurers and any direct payments for services not covered by an insurer. 39 The year 1997 ends a decade-long trend of declining shares of national health spending from consumer out-of-pocket sources. For the first time since the late 1980s, out-of-pocket spending grew markedly faster than private health insurance, reaching 5.3 percent in Growth in out-of-pocket spending slowed considerably between 1990 and 1994, in parallel with the growth in managed care enrollment. Managed care plans generally require more limited copayments for insured services and smaller deductibles than are required by indemnity insurance. 40 However, private survey data suggest that some of the accelerated out-of-pocket growth during the past three years may be coming from these same plans, which are now requiring enrollees to pay more to use plan benefits. For example, in 1993 only 34 percent of HMO enrollees had copayments of $10 or more per physician visit. In 1997, 70 percent of enrollees were required to pay at least $10, and similar trends are occurring in point-of-service (POS) plans. In 1997 these two plan types covered about half of all private health insurance enrollees in medium and large private firms. 41 CONCLUDING COMMENTS Trends in health care spending over the past few years show remarkable restraint in growth. Some speculate that this signals a health care marketplace that is entering a per- H E A L T H A F F A I R S ~ V o l u m e 1 7, N u m b e r 6

11 manent new era of health spending control, in which employers play a stronger role in preserving low health premium increases. Lurking beneath this placid panorama are potential pressures for increased spending. Upward pressure on premiums continued in 1997 for insurers experiencing growth in benefit payments that was higher than premiums earned and the demand by stockholders to correct eroding operating margins. Providers also may put more pressure on insurers to raise negotiated payments to offset slower public spending growth resulting from the BBA. Calls for increased quality and choice continue to be debated; if such options are enacted, they may drive premiums higher. Total premiums also are likely to rise as the cumulative savings from many individual employers switches to lower-cost managed care plans for coverage of workers taper off, because most employers have already made the change. Additional pressures will come in the form of increased consumer demand. Recent strong economic growth has boosted employment and wages while prompting employers to offer health insurance to attract a qualified workforce. This is expected to temporarily lower the rate of uninsurance and increase demand for medical services, as is evident when insurance coverage is acquired. It also will raise average income, prompting increased demand for services. Demand likely will increase as new prescription drugs now in the pipeline reach the marketplace. Continued rapid increases in drug spending are likely to parallel or exceed the increases seen in In addition to the authors, the National Health Accounts Team includes Patricia McDonnell, Darleen Won, Anne Martin, Lekha Whittle, Carolyn Donham, Anna Long, and Madie Stewart. The opinions expressed here are the responsibility of the authors and do not necessarily represent those of the Health Care Financing Administration. NOTES 1. Volume and intensity include factors associated with aging of the population. Aging will not have a major effect on spending until approximately S. Burner and D. Waldo, National Health Expenditure Projections, , Health Care Financing Review (Summer 1995): Almost 90 percent of hospital spending was in community hospitals in 1997; 66 percent of community hospital revenues came from inpatient services; 4 percent of hospital spending was in nonfederal, noncommunity hospitals such as psychiatric hospitals, and 6 percent in federal hospital facilities such as those operated by the Departments of Defense and Veterans Affairs. 3. American Hospital Association, National Hospital Panel Survey, various years. 4. Ibid. 5. U.S. Bureau of Labor Statistics information, on the World Wide Web at indicatr/indicatr.htm (September 1998). 6. According to the AHA National Hospital Panel Survey, profit margins in the early prospective payment system (PPS) period ( ) were slightly higher at 6 percent than those recorded during the 1990s (5 5.5 percent). 7. The remaining portions were funded by other federal government agencies such as the Departments of Defense and Veterans Affairs; state and local subsidies to hospitals; and other private funding, including philanthropy. 8. C. Kane et al., Physician Managed Care Contracting, in Socioeconomic Characteristics of Medical Practice, 1997/98 (Chicago: American Medical Association, 1998), 7 16; and D. Emmons and C. Simon, Managed Care: Evolving Contractual Arrangements, in Socioeconomic Characteristics of Medical Practice, 1996 (Chicago, AMA, 1997), Ibid. 10. Calculated by the authors using data from the AMA, Socioeconomic Characteristics of Medical Practice, 1997/98, P. Kletke, Trends in Physician Practice Arrangements, in Socioeconomic Characteristics of Medical Practice, 1997/98, Income for employed physicians may be understated, since most also receive noncash compensation. J. Moser, Physician Income Trends in the Last Ten Years, in Socioeconomic Characteristics of Medical Practice, 1997/98, L. Tanner, Recruiters Target More Specialists, Survey Says, Dallas Business Journal, 27 August L. Tye, Shortage of Doctors Turns into a Surplus, Boston Globe, 3 September 1998; and R. Miller et al., Employment-Seeking Experiences of Resident Physicians Completing Training during 1996, Journal of the America Medical Association (2 September 1998): J. Graham, Medical School Applicants Dip; Costs, Working Conditions May Explain Drop, 109 H E A L T H A F F A I R S ~ N o v e m b e r / D e c e m b e r

12 110 Chicago Tribune, 1 February 1998; Association of American Medical Colleges, Why Are Some Schools Less Vulnerable to a Declining Applicant Pool? Contemporary Issuesin Medical Education, (10 September 1998). 16. C. Ukens, Benefit Boost: Health Plan Rx Costs Rise One-Third, Study Reports, Drug Topics (4 August 1997): C. Baker and N. Kramer, Employer-Sponsored Prescription Drug Benefits, Employer Benefits Survey: A BLS Reader, U.S. Department of Labor, Bureau of Labor Statistics Bulletin 2459 (Washington: U.S. Government Printing Office, February 1995). 18. Pharmacy Benefit Report: Facts and Figures (East Hanover, N.J.: Novartis Pharmaceuticals Corporation, 1997), IMS America, Data from the National Prescription Audit (Plymouth Meeting, Pa.: IMS America, 1998). A better utilization measure would be counting a day s supply of a drug rather than the number of prescriptions dispensed. However, data on this measure are not currently available. 20. Express Scripts Online, ValueRx Report Identifies Reasons for the Rapid Increase in Pharmacy Expenses 1997 Drug Trend Report Analyzes Prescription Drug Costs and Trends, www. express-scripts.com/esi/news/trends97.asp (September 1998). 21. F. Gebhart, Annual Rx Survey: The New Golden Age, Drug Topics (16 March 1998): E. Tanouye, Managed Care Is Boosting Drug Sales, Wall Street Journal, 17 October 1996, B J. Genuardi, J. Stiller, and G. Trapnell, Changing Prescription Drug Sector: New Expenditure Methodologies, Health Care Financing Review (Spring 1996): T. Bodenheimer and K. Sullivan, How Large Employers Are Shaping the Health Care Marketplace, New England Journal of Medicine (2 April 1998): B. Smith, Trends in Health Care Coverage and Financing and Their Implications for Policy, New England Journal of Medicine (2 October 1997): U.S. General Accounting Office, Medicaid: Sustainability of Low 1996 Spending Growth Is Uncertain, Pub. no. GAO/T-HEHS (Washington: GAO, February 1998). 27. J. Holahan and D. Liska, The Slowdown in Medicaid Spending Growth: Will It Continue? Health Affairs (March/April 1997): Personal Responsibility and Work Opportunities Reconciliation Act of 1996 (P.L ), enacted 22 August L. Ku and T.A. Coughlin, How the Welfare Reform Law Affects Medicaid, New Federalism and Options for States, no. A-5 (Washington: Urban Institute Press, 1998). 30. GAO, Medicaid: Sustainability of Low 1996 Spending Growth Is Uncertain. 31. To constrain growth in spending for physician services, Medicare implemented volume performance standards (VPS) in 1990 and incorporated them into the Medicare physician fee schedule in The VPS rewards or penalizes physicians and other professionals for changes in aggregate per capita utilization that occurred two years earlier. Since volume in 1994 and 1995 grew faster than specified targets, there was a penalty in the 1996 and 1997 payment rates. Since 1986 growth in the elderly population age sixty-five and older has been decelerating. Annual growth in 1997 slowed by two-tenths of a percentage point over 1996 growth. However, that trend is expected to reverse by The drop in freestanding home health agency revenue in 1997 is in sharp contrast to the 20 percent growth in Medicare funding for care provided by hospital-based home health care agencies in Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options (Washington: U.S. GPO, February 1995). 34. S. Smith et al., The Next Ten Years Of Health Spending: What Does the Future Hold? Health Affairs (September/October 1998): Mercer/Foster Higgins, National Survey of Employer-SponsoredHealth Plans, 1997 (New York: William M. Mercer, 1997). 36. Foster Higgins, National Survey of Employer- Sponsored Health Plans, Report/1996 (New York: Foster Higgins, 1996); and Center for Studying Health System Change, The Trajectory of Managed Care, Issue Brief, no. 9 (May 1997): The difference between premiums earned and benefits incurred is a measure of net cost, which includes insurers costs of paying bills, advertising, sales commissions, and other administrative costs; net additions to reserves; rate credits and dividends; premium taxes; and profits or losses. 38. Board of Trustees, Federal Hospital Insurance Trust Fund, 1998 Annual Report of the Board of Trustees of the Federal Hospital Insurance Trust Fund (Baltimore: HCFA, 28 April 1998). 39. Out-of-pocket spending excludes premiums paid by employees or individuals. These are counted as part of private health insurance. 40. KPMG Peat Marwick, Health Benefits in 1997 (Newark, N.J.: KPMG Peat Marwick, 1997), and earlier editions. 41. Ibid. 42. Smith et al., The Next Ten Years. H E A L T H A F F A I R S ~ V o l u m e 1 7, N u m b e r 6