Wall Street Journal, January 12, 1998

Health-Care Spending Rose 1.9% In 1996, But Bigger Increases Loom

By RON WINSLOW, Staff Reporter of THE WALL STREET JOURNAL

Total U.S. health-care expenditures rose an inflation-adjusted 1.9% in 1996, the slowest rate of growth in nearly four decades, a team of government researchers reported.

But the report, the broadest annual accounting of the nation's health costs, comes amid growing concerns -- especially among the nation's employers -- that a rash of troubles in the managed-care industry jeopardizes a five-year string of victories in keeping the lid on medical bills.

The study, published in the current issue of the journal Health Affairs, found that the total health-care tab in the U.S. topped $1 trillion for the first time in 1996, the latest year for which figures are available, despite the low rate of growth. That amounted to 13.6% of the gross domestic product, a percentage that has remained steady since 1993.

"This report shows significant progress in slowing the growth of health-care spending, "Donna E. Shalala, secretary of health and human services, said in a statement. She predicted that the balanced federal budget will continue to help hold costs in check by slowing the rate of spending on the Medicare program.

Renewed Friction Expected

But it may also portend renewed friction between the public and private sectors over who bears the brunt of anticipated growing medical inflation in the years ahead. Spending on publicly financed health-care services, including Medicare and the federal-state Medicaid program, rose at an annual average rate of 9.7% between 1989 and 1996 while private-sector spending, largely through employer-sponsored benefits plans, increased an average of just 5.8% a year over the same period.

Now the wide disparity in growth rates may narrow significantly or even reverse itself in the near future: The new federal budget calls for Medicare expenditures to rise just 2.5% for each enrollee in 1998. "Growth rates we'll be seeing in the future should bring Medicare back into line or even below the line of what the nation is experiencing overall," said Katharine R. Levit, who heads up the Health Care Financing Administration's National Health Statistics Group, which wrote the new report.

Private Sector Sees 5% Rise

Meantime, developments in the private sector have many employers braced for health-cost increases above 5% for the first time since the early 1990s. Premium increases for the federal government's own employee health-care plan averaged 8.5% for 1998 while benefits consultant Towers Perrin says large employers expect health costs to rise about 4% this year and even more in 1999. One factor in these increases is a profit crunch at major managed-care companies such as Aetna Inc., Oxford Health Plans Inc. and PacifiCare Health Systems that have served as the private sector's chief agents in the war on health-care costs.

"All of these tidbits of information suggest that the very low rates of increase we've seen on the private side aren't going to be maintained," said Ms. Levit.

During the 1990s, higher rates of Medicare spending gave providers "something of a safety cushion" as they lost income in the face of pressure from managed care, the report found. Now, as Medicare spending growth also slows, doctors and hospitals may look for ways to raise rates again in the private sector.

"As these public and private forces converge," the authors of the study said, "growth in overall expenditures may begin to rise." But they said they saw no immediate reason to think that overall national costs would "return to the double-digit increases of the 1980s."

The new report found that national health expenditures in 1996 rose 4.4% before inflation to $1.04 trillion, or $3,759 a person. In 1995, the nation spent $991.4 billion, or $3,633 for every American.

Rapid Managed-Care Growth

Ms. Levit and her colleagues cited the "exploding growth" of managed care during the 1990s as a major factor in the declining growth rate, particularly for the somewhat diminished role big-ticket hospital and

physician services play in the health-care economy. Though still the dominant actors in the industry, the combined share of national health-care spending allotted to doctors and hospitals fell to 54.1% in 1996 from 57.6% in 1990.

By contrast, costs for prescription drugs have risen sharply, including a 9.2% rise in 1996. Ms. Levit noted that, among other things, the success of managed-care plans in reducing length of hospital stays means that many hospital patients are now going to their local pharmacist to purchase drugs that once were given in the hospital and accounted for as hospital costs. In addition, private insurance covered 45% of prescriptions filled in 1996 compared with 34% in 1990.

Private health-insurance premiums accounted for $337.1 billion of health expenditures in 1996, of which $316.4 billion came from employer-based health benefits programs. The report noted what many employees have experienced in recent years -- that their companies have passed on an increasing share of health costs to the workers. The percent of premiums paid by employers fell to 83.4% in 1996 from 84.5% in 1990, a 1.1 percentage-point difference that amounted to a whopping cost shift to employees of $3.6 billion in 1996 alone.