Key Findings on Health Care Spending

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      Several studies have documented that growth in health care spending in the United States slowed between 1990 and 1995. This has led many to assume that the health care inflation crisis of the early 80s and 90s has been solved. However, more recent indicators have started to paint a different picture. The data in the following report clearly demonstrate that, despite a moderation in consumer spending for all types of health care during the last two years, the growth rate of private insurance premiums has begun to escalate once again. By the year 2002, we will be spending nationally $500 billion a year more on health care than in 1997.

      The report on “Changes in the Growth in Health Care Spending” examines the current trends in health care spending and examines how various purchasers of health care and health insurance have fared.

National Health Care Expenditure Trends

  • Although we have heard much recently about health care spending coming under control, the most recent data show higher growth in private insurance premiums. Historically, inflationary increases in health care spending have moderated during periods of intense national scrutiny of the health care system. Typically, these reductions have been temporary. Health care spending has tended to escalate immediately after public attention has shifted to other national priorities. In the aftermath of the reform debate of 1992-94 the data now point to an acceleration in the rate of health care spending over the next five years.
  • Since 1995, the projected growth in health care expenditures has been on the rise. Several factors are contributing to the renewed pressure, including an erosion in operating margins among health plans, the persistent growth in out-of-pocket spending, and the continued rise in Medicare and Medicaid costs.
  • The growth in health care spending is expected to rise at twice the underlying rate of inflation. This is lower than observed over the past 15 years, but not as low as much of the attention on the subject might suggest. Indeed, adjusted for inflation, the projected growth in national health care spending is lower only by 1 to 2.5 percentage points than it was in the 1980’s and the early 1990’s.
  • In 1996, national health expenditures are estimated to have exceeded $1 trillion and are projected to increase 50% to nearly $1.5 trillion by the year 2002, a rate of nearly 3.5 percentage points above the underlying rate of inflation.
  • Even with the recent budget bill agreement, Medicare and Medicaid spending are expected to rise at twice the rate of inflation.
  • During 1997, health care is projected to account for 13.8 percent of our gross national product, rising to nearly 15 percent by the year 2002.

Consumer and Household Health Care Expenditure Trends

  • Middle-income American families, especially single parents and couples with children, are hardest hit by the current increases in health care inflation. Families with incomes of between $20,000 and $40,000 per year are losing a higher percentage of their incomes to health care inflation than any other segment of American society. The poor are covered by Medicaid and, for the wealthy, health insurance spending increases constitute a small percentage of income. If health care had remained a constant share of the household budget during the 1990s, a middle-income American family would have between $500 and $1000 more of their income to spend or save annually.
  • While spending increases will affect all income sectors, married couples with children will spend 5.5 percent above inflation and single-parent families will spend as much as 10 percent above inflation for their health care.
  • The current health care delivery system in the U.S. imposes a regressive tax on middle-income families. Hidden within the costs of health insurance is the cost of care for 42 million of our fellow Americans who are not insured. This cost shift is, in effect, a tax on the insured to pay for care for the uninsured and underinsured. This hidden tax is regressive, taking a much higher percentage of income from middle-income Americans than from the more affluent. The continued rise in the number of uninsured will intensify the cost shift to middle-income families.
  • Family spending includes payments for health insurance, spending on copayments, deductibles, and direct spending on services not covered through health plans. The magnitude of these expenditures can be substantial, in some cases accounting for 15-20 percent of the family budget.
  • It is expected that the average household will spend approximately $2000 per year on health care during 1997.
  • Between 1993 and 1995, families earning between $40,000 and $50,000 saw their health insurance payments rise 8.5 percent per year, and families earning $50,000 to $60,000 faced an average increase of 5.6 percent. In contrast, families earning above $60,000 experienced minimal growth in payments.

Business Health Care Expenditure Trends

  • Over the next several years, it is expected that health insurance premiums will rise 5 percent per year. The experience across firms will differ substantially, however.
  • The growth in spending among small firms will rise faster than among larger firms. Conservative predictions for the next six years show the smallest firms could see annual increases in premiums.
  • Health care expenditures have begun to increase for large businesses in 1997 and are expected to accelerate in 1998. Shifting employee health benefits from fee-for-service insurance to managed care has enabled large employers to moderate their premium increases in recent years. However, with over 75 percent of workers now enrolled in managed care plans, the one-time savings associated with this shift have already been realized. In addition, the dramatic proliferation of managed care plans in recent years has led to fierce competition for market share among the plans. Aggressive pricing policies in the early and mid 1990’s have eroded the profit margins of managed care providers. In response, the plans have started to demand higher premiums from their customers. And, as the number of Americans without health insurance, or with inadequate coverage, continues to rise, cost shifting will place an increasing upward pressure on the prices charged all insurance purchasers.

Full copies of “Changes in the Growth of Health Care Spending: Implications for Consumers” are available by contacting the National Coalition on Health Care at (202) 637-6830.

Press Release: National Study Reveals Dramatic Increase of Health Care Costs