Rise in health care costs is slowed some think the trend can continue

The Outlook

February 18, 1996|By M. William Salganik and Jay Hancock

EMPLOYERS and government agencies seem to be winning the war against higher health care costs. Last year, hospital charges, doctor fees, MRI scans and other medical costs rose by 3.9 percent. That was faster than inflation generally but still the smallest upward ratchet for health care since 1972.

Is the day of double-digit medical inflation over? Some analysts don't think so. Progress recently has come largely from wringing excessive care out of the system, they say. By refusing to pay for unneeded hospital stays and by forcing doctors to work more efficiently, HMOs and other "managed care" insurers have removed much air from the medical balloon.

But the easy gains may be past, skeptics say.

Care can be streamlined only so far before quality is affected. And the seismic forces that pushed up medical costs in the 1980s are still with us.

Employee benefit costs, largely made up by health care, popped up by 1.3 percent in 1995's fourth quarter, according to Labor Department data disclosed last week. That's a 5.2 percent TC annual rate and the fastest quarterly increase in almost three years.

Medical inflation in the Baltimore area seems to be taking the opposite tack, however.

The region's health costs were rising at an annual rate of 10.5 percent in January 1995; by November they had slowed to an annual inflation rate of 1.5 percent, said Robert Riva, economist with the Regional Economic Studies Program at the University of Baltimore.

Is this a dose of things to come? Or is it temporary?

Jonathan Weiner

Professor of health policy and management, Johns Hopkins School of Public Health

Inflation in health care the last few years has been lower than in the past 20 or 30 years. Few analysts believe it will continue to grow so slowly.

The population will get older, new technologies will come on line, and we still haven't grappled with the uninsured.

On the other hand, payers are not going to tolerate the 15 to 20 percent annual increases we saw in the 1980s.

Most experts believe that over the last couple of years we've had the so-called "Hillary effect."

Health-care reform failed, but insurers and providers realized that if they didn't keep health costs under control, government intervention was likely.

Gary Lake

Principal in the Washington, D.C., office of Foster Higgins, a benefits consulting firm

I see it [health inflation] fairly stable. I don't see it going back to the minus [Doster Higgins' annual survey showed an actual decline in 1994] but it's not cranking up, either. I'm not expecting it to ever go back to the double-digit days we've seen before.

There's still a lot of competition among managed-care companies. Everybody's trying to get more bodies into their systems, and that's driving the prices.

The bottom line is that there is still some wringing out to do to the health-care system -- making sure that patients are getting an appropriate level of care, but not getting an MRI every time they have a headache. All that stuff is basically moving from West to East, and on the East Coast, there is still a lot that can change.

Another thing we're seeing is a lot of HMOs moving more toward having out-of-network benefits. Typically, that adds to the price, although it depends on where you set the level of co-insurance. Some plans are going as low as 50 percent. But most are higher, and at 80 or 70, you can still get a lot of utilization of expensive doctors, because the patient figures it's OK to pay 20 percent.

Paul Fronstin

Research associate, Employee Benefit Research Institute

When you look at health care cost inflation and you look at the overall consumer price index, health care cost inflation is still about double overall inflation.

So I'm not sure whether we can claim success or not. On the other hand, employers are certainly happy with their efforts to manage health care costs. Part of this has to do with managed care, and part of this may be a reduction in profits to health-care providers.

Phil Merdinger

Principal, William M. Mercer Inc.

What you're seeing in health-care costs now is really the result of changes in the health care delivery system itself. We went through this flurry of health care proposals from the Clinton administration, but the system was already reforming itself back then. And I think the reforms are continuing as health care providers are looking for ways to be more efficient, to be less expensive, to make more money.

Does that mean health care cost increases are going to stay in the single-digit range? I wish I knew for sure, but I think you're seeing systemic changes, which, all else being equal, make me a little more encouraged.

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