Recording the fastest growth since

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1 Trends Trends In U.S. Health Care Spending, 2001 The rise in health care s share of GDP is more a result of a slowing economy than of rising health spending. by Katharine Levit, Cynthia Smith, Cathy Cowan, Helen Lazenby, Art Sensenig, and Aaron Catlin ABSTRACT: U.S. health care spending grew 8.7 percent to $5,035 per capita in Total public funding continued to accelerate, increasing 9.4 percent and exceeding private funding growth by 1.2 percentage points. This acceleration was due in part to increased Medicaid spending in the midst of a recession and payment increases for Medicare providers. Prompted by sluggish economic growth and by faster-paced health spending, health spending s share of GDP spiked 0.8 percentage points in 2001 to 14.1 percent. Recording the fastest growth since 1991, total health care spending reached $1.4 trillion in 2001 (Exhibit 1). While the 8.7 percent rate of nominal spending growth in 2001 was less than the average 9.7 percent growth between 1988 and 1993 that preceded widespread adoption of managed care plans, it was well above the average growth rate of 5.7 percent between 1993 and 2000 as managed care proliferated (Exhibit 2). After inflation is adjusted for, real growth in health spending measured 6.2 percent in 2001, edging above the 3.8 percent average in the period but nearly equivalent to the average real growth measured in the period. 1 The sharp increase in the health share of gross domestic product (GDP) from 13.3 percent in 2000 to 14.1 percent in 2001 was due less to health spending increases than to slower economic growth resulting from the recession that began in March 2001 and that was exacerbated by the September 2001 terrorist attacks. 2 Health spending accelerated 1.3 percentage points, while economic activity decelerated 3.3 percentage points. The spike in health spending s share of GDP is similar to that observed in the recession (Exhibit 3). In both recessions, growth in the quantity of services used per capita was high, rising more than 3 percent annually. 3 Unlike the earlier recession, however, 2001 was marked by health-specific price inflation (3.6 percent) that was 2.4 percentage points lower than during the recession. The era between recessions ( ) was dominated by managed care. Growth in the quantity and intensity of services consumed slowed abruptly through 1994, before nearly recovering to the growth levels by the end of the decade. An even stronger reduction in medical price growth through 1997 Katie Levit is director of the National Health Statistics Group, Office of the Actuary, Centers for Medicare and Medicaid Services (CMS), in Baltimore. Cynthia Smith, Cathy Cowan, Art Sensenig, and Aaron Catlin are economists; Helen Lazenby is a health insurance specialist in the National Health Statistics Group. A group of papers by Stuart Altman and colleagues; Mark Pauly; and Henry Aaron, analyzing the pros and cons of health spending increases, is available free on the Health Affairs Web site, Spending_Web_Excl_ htm (posted 8 January 2003). 154 January/February Project HOPE The People-to-People Health Foundation, Inc.

2 Trends EXHIBIT 1 National Health Expenditures (NHE), Aggregate And Per Capita Amounts, And Share Of Gross Domestic Product (GDP), Selected Calendar Years Spending category NHE, billions Health services and supplies Personal health care Hospital care Professional services Physician and clinical services Other professional services Dental services Other personal health care Nursing home and home health Home health care a Nursing home care a Retail outlet sales of Prescription drugs Durable medical equipment Other nondurable Program administration and net cost of private health insurance Government public health activities Investment Research b Construction Population (millions) NHE per capita Personal health care deflator c Real NHE d, billions of dollars GDP, billions of dollars Chain-weighted GDP index Real GDP, billions of dollars $ $ $251.5 $1, $3,578 $ $1, $430.8 $2, $4,901 $ $2, $695.7 $5, $6,368 $ $2, $804.3 $5, $6,708 $ $3, $944.2 $6, $7,063 $1, , , $4, $1,165.1 $9, $8,859 $1, , , $4, $1,22 $9, $9,191 $1, , , $5, $1,301.9 $10, $9,215 NHE as percent of GDP 7.0% 8.8% 10.9% 12.0% 13.4% 13.2% 13.3% 14.1% SOURCES: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group; and U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the Census. 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 but are included in the expenditure class in which the product falls. c Personal health care (PHC) chain-type index is 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. d Deflated using GDP chain-type price index (1996=100.0). had a more long-run effect, although the pace of growth picked up somewhat toward the end of the decade (Exhibit 4). 4 Managed care plans restrained health spending growth by slowing the rate of price increases paid to providers and, to a lesser extent, slowing growth in the quantity of services used per capita. While a slowdown in price growth dominated in the 1990s, growth in utilization (including changes in service mix and intensity) was a more important factor in 2001, surging to 3.8 percent per capita, compared with an average HEALTH AFFAIRS ~ Volume 22, Number 1 155

3 EXHIBIT 2 National Health Expenditures (NHE), Average Annual Percentage Growth From Prior Year Shown, Selected Calendar Years Spending category 1970 a NHE Health services and supplies Personal health care Hospital care Professional services Physician and clinical services Other professional services Dental services Other personal health care Nursing home and home health Home health care b Nursing home care b Retail outlet sales of Prescription drugs Durable medical equipment Other nondurable Program administration and net cost of private health insurance Government public health activities Investment Research c Construction Population NHE per capita Personal health care deflator d Real NHE e Gross domestic product (GDP) Chain-weighted GDP index Real GDP 10.6% % % % SOURCES: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis; and U.S. Bureau of the Census. a Average annual growth, b Freestanding facilities only. Additonal 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. d Personal health care (PHC) chain-type index is 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. e Deflated using GDP chain-type price index (1996=100.0) % % % % annual 1.6 percent in The recession and rapidly growing Medicaid expenditures that climbed to an average of 20 percent of state spending contributed to severe budgetary shortfalls in fiscal year 2001 for state governments. 5 Some states were also affected by declines in the Medicaid Federal Medical Assistance Percentage that were calculated based on data for periods when economic conditions were stronger, resulting in lower federal cost sharing for twenty-nine states. 6 In the recession states used provider tax and donation schemes to boost federal revenues and enrollment in 156 January/February 2003

4 Trends EXHIBIT 3 National Health Expenditures As A Share Of Gross Domestic Product, Calendar Years Percent SOURCE: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group. managed care to save Medicaid costs. In the current recession states reallocated tobacco settlement funds and capitalized on upper payment limit (UPL) arrangements to help close their Medicaid funding gaps. 7 A squeeze on employers revenues also occurred. As the insurance sponsor of 89 percent of those covered by private health insurance, employers agreed to large 2001 per worker premium increases but stable employee cost sharing when rates were negotiated in late 2000 with insurers for the upcoming year. 8 At that time, a tight labor market and booming economy indicated a continued need to offer more generous benefits, to compete for and retain workers. The subsequent economic recession in part precipitated a reassessment of this position for Spending By Sector The fastest-growing spending category in 2001 was prescription drugs (up 15.7 percent). The largest spending categories of hospital services (up 8.3 percent) and physician and EXHIBIT 4 Annual Percentage Change In Personal Health Care Spending Per Capita Growth Factors, Calendar Years Percent 6 4 Medical price index 2 0 Quantity of service use per person SOURCE: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group. NOTES: These factors are calculated by first dividing personal health care expenditures by population. Per capita spending is then deflated using the medical price index. The residual that results represents the quantity of service use per person. Because this factor is calculated as a residual, it also includes any errors in measuring prices or total spending. The medical price index is the personal health care chain-type index constructed from the Producer Price Index for hospital care, Nursing Home Input Price Index for nursing home care, and Consumer Price Indexes specific to each of the remaining personal health care components. The quantity of service use per person includes quality, intensity, and changing mix of services. HEALTH AFFAIRS ~ Volume 22, Number 1 157

5 EXHIBIT 5 Expenditures For Health Services And Supplies, By Type Of Service And Source Of Funds, Calendar Year 2001 Private funds Public funds Spending category Total Total a pocket Out-of- Health services and supplies (billions) Personal health care Hospital care Professional services Physician and clinical services Other professional services Dental services Other personal health care Nursing home and home health Home health care d Nursing home care d Retail outlet sales of Prescription drugs Durable medical equipment Other nondurable Program administration and net cost of private health insurance Government public health activities $1, , $ $ Private health insurance Total Medicare $ $ $ Federal and state Medicaid b $ Other public $ SOURCE: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group. NOTE: Numbers may not add to totals because of rounding. a Includes other private funds. b Includes State Children s Health Insurance Program (SCHIP) expansion (Title XIX). c Not applicable. d Freestanding facilities only. Additional services of this type are provided in hospital-based facilities and counted as hospital care clinical services (up 8.6 percent) increased at rates slightly slower than that of overall spending. In the past decade increasing third-party coverage and continued new drug introductions have spawned steady growth in prescription drug use and physician visits. 9 In contrast, community hospitals had experienced declining inpatient utilization for some time and only since 1998 have measured increases in inpatient days. This recent turnaround in inpatient use combined with continuing growth in outpatient visits has had a noticeable effect in increasing the pace of total health spending. Hospitals. Hospital spending ($451.2 billion) increased 8.3 percent in 2001, its fastest growth since Increases in hospital spending alone accounted for 30 percent of the increase in total health spending in 2001, the largest hospital contribution to the annual increase in total spending since Growth in hospital spending can be separated into growth in population, price, and a residual that includes changes in quantity of services consumed per capita. 10 Hospitalspecific price inflation grew 3.2 percent in 2001, slightly faster than in 2000 (2.6 percent). Population added 0.9 percent to hospital 158 January/February 2003

6 Trends growth essentially no change from prior years. Quantity of services used per capita, however, increased 4.2 percent, up from growth of 2.2 percent in This uptick in use was the largest contributor to the acceleration in hospital spending in Hospitals were under financial pressure for most of the 1990s, both from public payers and from the transition to managed care in the private sector. This pressure was most visible in the 15 percent reduction in community hospital inpatient days between 1990 and 1998 that was accomplished mostly through reductions in lengths-of-stay. 11 A steady shift to outpatient treatment between 1990 and 1998, contributing to a 57 percent increase in outpatient visits, partially offset the decline in inpatient days. Between 1998 and 2000 community hospital inpatient days increased (up 0.5 percent) for the first time since 1990, and preliminary data indicate an even larger increase in While utilization contributed greatly to revenue growth, it also fueled hospital employment growth of 2.3 percent in 2001, up from 0.2 percent in 2000, which caused an escalation in labor costs that must ultimately be reflected in hospital prices. 13 Prompted by an increasingly tight medical labor market, average hourly earnings for private hospital workers rose 6.1 percent in 2001 (compared with 4.1 percent for all private workers), up from 3.3 percent in 2000 and the fastest growth since While labor shortages have been widely reported for nurses, shortages exist in other fields, including pharmacology, imaging technology, and lab technology. 15 Prescription drugs. A key driver of overall spending trends, prescription drug spending grew almost twice as fast as all other health services in recent years, although signs of tempered growth have recently appeared. The pace in prescription drug spending eased to 15.7 percent in 2001 from 19.7 percent in 1999 and 16.4 percent in High spending growth in the late 1990s occurred as a wave of new blockbuster drugs entered the market. The moderation in spending growth in 2000 and 2001 can be traced in part to a deceleration in the rate of new product introduction. Fewer new drugs entered the market in 2001 (twenty-four in 2001, compared with twentyseven in 2000 and thirty-five in 1999). 16 Although spending growth continued to reflect the release of blockbuster drugs in the late 1990s, there was less growth arising from top-selling drugs in In that year sales of the top fifty drugs had risen by 21.4 percent, compared with 29.7 percent in Other factors contributing to a moderation in the rate of spending growth include rapid adoption of multitier copayment plans in the late 1990s through 2001, along with increasing copayments and other cost control methods such as generic incentive programs, prior authorization, and drug utilization review. 18 Employers adopting tiered drug plan structures have sometimes achieved sizable reductions in drug spending growth by shifting costs to consumers. 19 As consumer copayments continued to rise, out-of-pocket spending accounted for a greater share of the drug spending increase in 2001 than in prior years, narrowing the growth gap between private health insurance and out-of-pocket spending. Physician and clinical services. Spending on physician and other clinical services increased 8.6 percent in 2001, reaching $313.6 billion. This marked the second year of acceleration in physician spending, but it did not outpace the rates of the early 1990s. Spending growth might be linked to growth in imaging procedures and in physician visits that are often associated with drug prescribing, and to declining utilization review policies. 20 This was reflected in an increased rate of growth in aggregate work hours in physicians offices from 3.0 percent in 2000 to 4.4 percent in Consumers preferences for more loosely managed health plans likely contributed to rising expenditures. Nursing home care. Nursing homes are one of the slowest-growing health care sectors, because of the steady, decade-long decline in age-adjusted use rates. 22 Spending for freestanding nursing homes rose percent to $98.9 billion in 2001, the second year of accelerated growth after virtually no growth in The 1999 slowdown primarily resulted HEALTH AFFAIRS ~ Volume 22, Number 1 159

7 from effects of the Balanced Budget Act (BBA), which sharply reduced Medicare payments to skilled nursing facilities (SNFs). Even though Medicare funds a small share (9 12 percent) of total spending for nursing home care, its regulations strongly influence the industry. The BBA mandated a conversion from a cost-based reimbursement system to a prospectively determined payment system for Medicare SNFs, precipitating a decline of $1.9 billion in Medicare payments in In response to industry concerns about Medicare payment cuts, Congress modified some of the BBA limitations with temporary Medicare payment increases in the Balanced Budget Refinement Act (BBRA) and in the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act (BIPA). In 2001 these givebacks added $2.6 billion to Medicare nursing home payments, contributing to a 22.3 percent growth in Medicare payments, up from 13.4 percent in The primary payer for nursing home care is Medicaid, accounting for $47.0 billion (48 percent) of all spending (Exhibit 5). Medicaid nursing home spending grew 5.3 percent, slightly less than in 2000 (6.7 percent). In the federal-state partnership, states must contribute funds to obtain a federal match. In an effort to increase state revenues and expand federal financing, some states put in place UPL programs, a controversial strategy resulting in increased federal Medicaid spending with little or no real outlays by the states. 24 UPL programs, sometimes referred to as a Medicaid loophole, allow states to reimburse nursing homes owned by county or municipal governments at enhanced rates. 25 The federal match on state Medicaid spending is collected by states. Nursing homes then remand a portion of UPL funds back to states. Estimates of these amounts are excluded from the health accounts. Only 38 percent of nursing home care is privately funded either directly from patients and their families or through private health insurance. Private spending grew four percentage points more slowly than did total spending in 2000 and 2001, which suggests a decline in the number of private-pay patients. Industry experts speculate that growth in assisted living facilities may account for part of this loss. 26 Home health. The anticipation and implementation of several pieces of legislation, beginning with the BBA and modified by the BBRA and BIPA, have affected overall home health spending. Sizable reductions in Medicare payments between 1997 and 1999 led approximately 3,500 agencies to merge, withdraw from Medicare, or close entirely. Public spending declines began in 1997, as did a deceleration in private spending. Following a cumulative Medicare spending reduction of 34 percent between 1997 and 2000, an easing of payment limits helped to increase Medicare spending for freestanding home health agencies by $1.2 billion or 14.4 percent in 2001, as the number of agency closings tapered off. Medicaid home health spending growth doubled from 8.6 percent in 2000 to 17.3 percent in Combined Medicare and Medicaid spending rebounded by 15.6 percent in 2001, faster than overall home health spending of 4.5 percent. Consequently, public spending rose to 56 percent of total home health spending ($33.2 billion in 2001). Growing shortages of nurses and aides has further limited the service capacity of remaining home health agencies. Thus, home health industry aggregate work hours grew only 0.5 percent in 2001, compared with 1.8 percent in Remaining agencies may have been more likely to accept Medicare rather than private-pay patients because of the increased profitability of Medicare s prospective payment system (PPS) rates. 28 This in part caused private spending growth for home health services to drop 6.1 percent in Spillover impacts on other health services may have re- Private health insurance premium growth accelerated for the fourth consecutive year. 160 January/February 2003

8 Trends sulted, as patients sometimes sought care through use of ambulatory and emergency care services or turned to assisted living facilities or private-duty nursing services. 29 Public And Private Spending Public spending. Total public funding (which paid for 45 percent of all health care) continued to accelerate in 2001, increasing 9.4 percent and exceeding private funding growth by 1.2 percentage points. Important sources of growth were temporary Medicare increases to providers in the BBRA and BIPA, implementation of BBA policy changes, and increased Medicaid spending as a result of the recession. Medicare spending growth accelerated 2.8 percentage points in 2001, to 7.8 percent. Hospitals, home health agencies, and nursing homes were particularly affected by changes in public policy. The year 2001 was the first full year of impact for two important BBA policy changes: the home health PPS (October 2000) and the hospital outpatient PPS (July 2000). BIPA changes in policies include expanded provider eligibility for Medicare disproportionate-share hospital (DSH) payments, and providing full-market-basket increases for home health agencies, hospitals, and skilled nursing facilities operating under a PPS. Medicare spending among hospitals, nursing homes, and home health agencies combined accelerated in both 2000 and 2001, by and 5.1 percentage points, respectively. Legislation added $7.5 billion to total Medicare spending in 2001, with $2.6 billion alone benefiting inpatient hospital spending. 30 A change in Medicare managed care enrollment trends, increasing rapidly in before declining through 2001, has altered the spending growth rates among services. The share of Medicare spending attributed to capitated payments fell in 2001 as some managed care plans withdrew from or limited their participation in Medicare. 31 The associated 10 percent drop in Medicare managed care enrollment contributed to capitated payments dropping 3.8 percent and to growth in fee-for-service (FFS) expenditures of 10.3 percent. Because Medicare FFS spending per enrollee for physician services measured about 50 percent less than that of managed care enrollees, Medicare spending for physician services decelerated from 8.0 percent in 2000 to percent in As a result of managed care enrollees lower consumption of hospital services, however, the shift also likely contributed to higher hospital spending. Total Medicaid spending growth, excluding State Children s Health Insurance Program (SCHIP) expansions, accelerated two percentage points to 10.8 percent in 2001, the fastest growth since This acceleration was fueled by an estimated 8.5 percent rise in enrollment one impact of the recession along with state program expansions for uninsured populations, relaxed eligibility standards, and increased use of creative financing measures such as UPL programs. Medicaid spending ($224.3 billion) increased at double-digit rates for all services except nursing homes in Medicaid s fastest-growing expenditure, prescription drugs, decelerated slightly in Private spending. Private health insurance premium growth accelerated for the fourth consecutive year, with benefits growing more slowly than premiums in the past three years. Premiums rose 10.5 percent in 2001 to reach $496.1 billion, while benefits grew 10.1 percent. Competition among plans between 1994 and 1998 dampened premium growth as benefit spending grew, causing revenue shortfalls. Insurers recently raised premiums to recover from these losses, contributing to the net cost of private health insurance (or the difference between premiums and benefits) increasing slightly as a share of premiums from 11.2 percent in 1999 to 11.9 percent in Aggregate private health insurance premiums in the National Health Accounts reflect slower growth than frequently cited for 2001 in press reports. 32 Those citations usually quote rates per covered worker in employer groups. Growth in aggregate premiums, however, reflects changes in all premium rates as well as enrollment. In 2001 the recession, magnified by the events of September 11, caused declines in employment that reduced enrollment in employer plans by about 1 percent. HEALTH AFFAIRS ~ Volume 22, Number 1 161

9 These declines were concentrated in industries such as manufacturing and wholesale trade, where insurance enrollment rates (offer and take-up rates) per worker were highest. 33 Insurance premium rates were also affected by the continued enrollment shift from tightly managed, lower-cost health maintenance organization (HMO) plans to more loosely managed, higher-cost preferred provider organization (PPO) and point-of-service (POS) plans, as workers increasingly showed preference for broader access to providers despite higher costs. Private health insurance funds the largest portion of overall health care spending (35 percent). In 2001 three-quarters of all insurance expenditures were for hospital care, physician and clinical services, and prescription drugs, accounting for 31 percent, 30 percent, and 13 percent of expenditures, respectively. While physician and clinical services benefits have remained a relatively stable share of insurance premiums for many years, a steady decline in the share of benefits paid to hospitals since 1990 has largely been offset by an increase in prescription drug benefits. In 2001 out-of-pocket spending was $20 billion, or 14 percent of health spending (Exhibit 6). Out-of-pocket spending increased 5.6 percent, only half as fast as private health insurance premiums. EXHIBIT 6 National Health Expenditures (NHE), Amounts And Average Annual Percentage Growth, By Source Of Funds, Selected Calendar Years, Source of funds 1970 a NHE, billions $73.1 $245.8 $558.1 $696.0 $888.1 $1,219.7 $1,310.0 $1,424.5 Private funds Consumer payments Out-of-pocket payments Private health insurance Other private funds Public funds Federal Medicare Medicaid b Other federal c State and local Medicaid b Other state and local c Average annual growth in NHE from prior year shown 10.6% 12.9% 10.8% 11.7% 8.5% 5.4% 7.4% 8.7% Private funds Consumer payments Out-of-pocket payments Private health insurance Other private funds Public funds Federal Medicare Medicaid b Other federal c State and local Medicaid b Other state and local c 20.1 d d d SOURCE: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group. NOTE: Numbers may not add to totals because of rounding. a Average annual growth, b Includes State Children s Health Insurance Program (SCHIP) expansion (Title XIX). c Includes SCHIP (Title XXI). d Not applicable; Medicare and Medicaid became effective in July January/February 2003

10 Trends Conclusion While health spending accelerated in 2001, growth remains less than the long-run historical rate of 10.2 percent experienced from 1960 to A gap in growth between health care sponsors decelerating revenues and increasing health care costs has emerged in 2001, forcing these sponsors to reexamine spending priorities. Many employers may have already taken preemptive actions by 2002 that shift a portion of rising costs to workers. 34 At the same time, federal and state government obligations could increase if a prolonged recession causes the number of uninsured people to rise. States may have to resort to more austere decisions to balance Medicaid budgets in FY 2002 than they did in Managed care s influence has waned in the past few years, contributing to acceleration in hospital and overall spending. Hospital spending growth was proportional to its share of total health spending in 2001, a condition not met in recent years. Hospitals are seeing growth in demand for services and higher input prices, including rising wages resulting from shortages of health care workers, which further contributes to escalating costs. The disparity between GDP growth and health care spending trends caused health spending s share of GDP to spike in Historically, large increases in the health share of GDP have prompted private initiatives or public policy changes that slowed the pace of health spending growth. In uncertain economic times, health care sponsors may be less able to shoulder the escalating costs of health care, forcing trade-offs between health care and other competing priorities. As health care costs rise, consumers may be asked to contribute more toward existing coverage, or their choice of plans, providers, and benefits may be narrowed. The authors thank the Centers for Medicare and Medicaid Services (CMS) and anonymous peer reviewers for their helpful comments. In addition to the authors, the National Health Accounts Team includes Pat McDonnell, Anne Martin, Lekha Whittle, Carolyn Donham, Anna Long, Madie Stewart, and Mark Zezza. The opinions expressed here are the authors and do not necessarily represent those of the CMS. NOTES 1. Deflated using the GDP chain-type price index. 2. National Bureau of Economic Research, The NBER s Recession Dating Procedure, 9 October 2002, (23 October 2002). 3. Calculation is described in Exhibit The medical Consumer Price Index (CPI) is commonly used to measure price inflation, but the ability of CPIs to capture pure price change has been controversial. See J.P. Newhouse, Medical Care and Economywide Price Indexes, NBER Reporter (Fall 2001), reporter/fa1101/newhouse.html (16 October 2002); and I.K. Ford and D.H. Ginsburg, Medical Care in the CPI, 21 May books/medical_output/cpi.pdf (16 October 2002). Therefore, the CMS constructs its own personal health care index based on the best available price indexes for each sector. (See Exhibit 4 for indexes used.) Both spending estimates and price indexes are subject to errors in measurement that could affect aggregate growth as well as price and quantity growth separately. Despite these limitations, tracking price and quantity growth provides some useful insights for understanding the causes of spending increases and how the contribution of these factors have changed over time, especially during periods of varying economywide price change. 5. National Association of State Budget Officers, NASBO Analysis: Medicaid to Stress State Budgets Severely into Fiscal 2003, 15 March 2002, Medicaid2003.pdf (13 September 2002). 6. L. Ku et al., State Medicaid Cutbacks and the Federal Role in Providing Fiscal Relief to States (Washington: Center on Budget and Policy Priorities, August 2002), Ibid. 8. U.S. Bureau of the Census, Historical Health Insurance Tables, hhes/hlthins/ historic/hihistt1.html (26 August 2002). 9. D. Cherry and D. Woodwell, National Ambulatory Medical Care Survey: 2000 Summary, Advance Data from Vital and Health Statistics no. 328 (Hyattsville, Md.: National Center for Health Statistics, 2002), Price is measured using the Producer Price Index (PPI) for hospital services. The residual includes changes in service mix, in technology used to deliver services, in age/sex mix of services used, and any errors in measuring overall spending and HEALTH AFFAIRS ~ Volume 22, Number 1 163

11 prices. 11. American Hospital Association, Hospital Statistics, U.S. Registered Community Hospital Data (Chicago: AHA, various years). 12. AHA, Hospital Statistics, 2001 (Chicago: AHA, 2002); and Centers for Medicare and Medicaid Services, Table 1, Selected Community Hospital Statistics: , data from the AHA National Hospital Indicator Survey, statistics/health-indicators/t1.asp (16 September 2002). 13. Bureau of Labor Statistics, Current Employment Statistics (sum of federal, state, local, and private hospital employment), home.htm (9 September 2002). Labor costs accounted for 53 percent of hospital costs in 2000 and therefore heavily influence overall cost trends. AHA, Hospital Statistics, BLS, Current Employment Statistics. 15. M. Craver, Health Industry Job Shortages to Worsen, Kiplinger Business Forecasts, 15 May U.S. Food and Drug Administration, Center for Drug Evaluation and Research, Approval Times for Priority and Standard NMEs, Calendar Years , Press Release, rdmt/nmeapps93-01.htm (9 September 2002). 17. S. Findlay, Prescription Drug Expenditures in 2001: Another Year of Escalating Costs (Washington: National Institute for Health Care Management, 2002), 13, Table 3; and S. Findlay, Prescription Drug Expenditures in 2000: The Upward Trend Continues (Washington: NIHCM, 2001), 17, Table V. Goff, Pharmacy Benefits: New Concepts in Plan Design, National Health Policy Forum Issue Brief no. 772 (Washington: George Washington University, 2002), AdvancePCS, Health Improvement Report (Press Release, 24 April 2002); and B. Motheral et al., Effect of a Three-Tier Prescription Copay on Pharmaceutical and Other Medical Utilization, Medical Care 39, no. 12 (2001): PricewaterhouseCoopers, The Factors Fueling Rising Healthcare Costs (Washington: PWC, 2002); and Cherry and Woodwell, National Ambulatory MedicalCareSurvey. 21. BLS, Current Employment Statistics. 22. National Center for Health Statistics, Health, United States, 2001 (Hyattsville, Md: NCHS, 2002), Supplementary Medical Insurance (SMI, or Part B) items and services that previously were separately billed were bundled into the PPS rate. 24. T. Coughlin and S. Zuckerman, States Use of Medicaid Maximization Strategies to Tap Federal Revenues: Program Implications and Consequences, Assessing the New Federalism Discussion Paper, June 2002, _DP0209.pdf (13 September 2002). Beginning in the early 1990s, DSH payments were used to increase federal funding with little contribution by states. 25. Ibid. 26. Nursing home spending includes assisted living facility revenues only if an on-site nursing facility is part of the assisted living facility s services. 27. BLS, Current Employment Statistics. 28. U.S. General Accounting Office, Medicare Home Health Care: Payments to Home Health Agencies Are Considerably Higher than Costs, Pub. no. GAO (Washington: GAO, 2002). Both decreases in services provided per episode and home health agencies serving a larger proportion of users categorized in higher-payment groups may be adding to these agencies profitability. 29. Some revenues from nursing services are counted under other professional services. Temporary services received through nurse registries are counted in government statistics under temporary help agencies and are excluded from the accounts. 30. CMS actuarial estimates prior to passage of the BBRA and BIPA. 31. GAO, Medicare+Choice: Recent Payment Increases Had Little Effect on Benefits or Plan Availability in 2001, Pub. no. GAO (Washington: GAO, 2001). 32. Henry J. Kaiser Family Foundation, National Journal Examines Rise in Health Costs, Kaiser Daily Health Policy Report, 21 June , report.cfm?dr_id=5381&dr_cat=3 (16 September 2002); and Towers Perrin, 2002 Health Care Cost Survey Report of Key Findings, Medical Benefits, 30 January 2002, Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey, Insurance Component,meps.ahrq.gov/MEPSDATA/ic/ 1999/Tables_I/TIB1.pdf and meps.ahrq.gov/ MEPSDATA/ic/1999/Tables_IV/TIVA4SIC.pdf (16 September 2002). 34. Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits: 2002 Annual Survey (Menlo Park, Calif., and Washington: Kaiser/HRET, 2002), January/February 2003