Eighth Annual Wall Street Comes to Washington Conference June 18, 2003 Joy M. Grossman, Ph.D.

Recent HSC Studies  Strunk and Ginsburg, "Tracking Health Care Costs: Trends Stabilize but Remain High in 2002", Health Affairs,Web-exclusive, June 11, 2003 and Data Bulletin No. 25, June 2003  Lesser and Ginsburg, “Health Care Cost and Access Problems Intensify: Initial Findings From HSC's Recent Site Visits”, Issue Brief No. 63, May 2003  Devers, Brewster, and Ginsburg “Specialty Hospitals: Focused Factories or Cream Skimmers?”, Issue Brief No. 62, April 2003

Rapid Spending Growth Threatens Affordability of Health Insurance  Health care cost trend declined slightly in 2002, but insurance premium trend continued to accelerate in 2003  Increased consumer cost sharing but few other strategies to control costs  Provider strategies exacerbating cost growth  Consumer financial burden and uninsurance rates likely to increase

Overall Cost Trend Declined Slightly But Remained Very High Sources: Health care services: Milliman USA Health Cost Index ($0 deductible); U.S. economy: Gross Domestic Product (GDP)

Components of Cost Trend  Hospital care the most important contributor –Use trend has moderated –Price trend continues to accelerate  Prescription drug trend has slowed but still high

Key Health Care Cost Drivers  Short term –Retreat from tightly managed care –Growing provider leverage –Labor shortages –New drugs and advertising  Key long term driver is new technology

Premium Increases Grow Even As Employees Face More Cost Sharing  Insurance premiums in 2003 higher than in 2002 –15 percent net increase vs. 13 percent –Underwriting cycle has not yet turned  Benefit buy down also grew between 2002 and 2003 –3 percent vs. 2.5 percent –PPO deductible, drug copays

Employers Aggressively Shift Costs  Employee cost sharing more widespread and affecting more services than two years ago  Unionized firms and public sector employers adopting premium sharing  For those with premium-sharing already, increasing copays and deductibles and moving to coinsurance

Some Indications of Eroding Coverage  Some reports of small firms dropping coverage  Incentives for employees to drop dependent coverage or switch to spouse’s plan

Managed Care: Improved Profitability But Few Strategies for Cost Control  Plans’ financial performance has improved  Few traditional cost-control strategies remain viable  Experimentation with product design but limited take up –Tiered provider networks –Consumer-directed health plans

Provider Strategies Contributing to Cost Pressures  Hospitals maintain leverage in contract negotiations  Competition for profitable specialty and ancillary services heats up

Outlook  Unclear if cost trend will continue to slow appreciably  Turn in insurance underwriting cycle would slow premium trend  Consumers likely to continue to face increasing financial burden and loss of coverage

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