February 2004
By ROBERT PEGG
Accelerated spending on health care has been a permanent fixture of the U.S. economy for some time. Health benefit costs rose six percent, for example, in the early part of 2003, the fastest growth since 1990. Health care benefit costs are rising even as the economy has struggled. While during the last recession health care benefit costs slowed, largely due to managed care initiatives, they have now accelerated through the recession and weigh heavily on corporate bottom lines, diluting the effects of cost cutting programs.
The good news is that, even though consumer health care burdens are rising and millions have no health insurance, the average consumer still is responsible for only a relatively small part of his health-spending bill. In 2001, for example, private health insurance paid for more than 35 percent of total health care spending in the U.S. Private health insurance was followed by Medicare (the program for ages over 65) at 17 percent and Medicaid (the program for the poor) at 16 percent. Out-of-pocket consumer payments accounted for only 14 percent of total spending. The government has been paying significantly more through both Medicare and Medicaid. Medicare outlays increased a moderate four percent in 2002-03, mainly a result of caps in spending. However, Medicaid spending rose 12 percent in aggregate over the same time. In 2002-03, Medicare and Medicaid spending together were rising at an eight percent annual rate.
Nevertheless, consumers are footing more of the bill as employers increasingly are shifting the cost burden for health care to employees. Consumers are now paying for the increased choice and access that they have gained from Health Maintenance Organizations (HMOs) over the past several years. Average annual employee contributions for health benefits rose 36 percent for single coverage and 26 percent for family coverage between 2000 and 2002. Higher monthly payments and higher co-payments, combined with tiered benefits, are curbing elective spending on health care.
Medical inflation has risen much faster than the overall consumer price index due to accelerating costs of medical care and rising insurance premiums. In 2003, the overall monthly consumer price index, has been rising between two percent to three percent. The medical care component has been rising at more than four percent annually. The fundamental pressures on medical prices seemingly resist change. On the health provider side, rising labor costs and increased utilization, coupled with pressures from consumers for providers' choice, has strengthened the provider's hand in negotiation for reimbursements from insurance companies. As a result, prices have risen. Now potential cutbacks in Medicaid reimbursements, due to state fiscal problems, may also place additional pressure on prices.
While there are few in agreement as to how to best put a lid on rising medical costs, several initiatives may slow down rising medical expenses. The Food and Drug Administration (FDA) is hoping to facilitate more rapid introduction of cheaper generic drugs to the market place. The FDA currently is attempting to get more funding toward the generic drug review and approval process. With that, some drug prices, which, in the U.S. are the highest in the world, may come down. Another initiative aimed at controlling medical price increases is consumer-driven health plans. These plans entail the premise that the employer will contribute a fixed amount of monthly dollars to employees, which they can then use to purchase the kind of medical insurance coverage they desire. This is similar to employee contributions to investment accounts. These plans are slowly gaining credibility. More than seven percent of large employers in a recent survey said they were considering implementing consumer-driven health plans, well above the one percent reported in a prior survey.
Another possibility concerns the development of specialty hospitals, which are smaller than the typical medical facility and offer specialized care in specific ailments such as cancer or arthritic surgery. Specialty hospitals may someday put competitive pressure on the more traditional medical centers. The surge in specialty centers has already been cited by traditional hospitals as a primary concern for lower than expected patient volume and revenues.
Despite these and other attempts to control health care costs, U.S. health care spending will still rise moderately in the future due to utilization and demographic changes taking place in the nation's population. The need to finance hospital construction to take care of aging baby boomers is one of the factors that will keep hospital costs rising. Moreover, the widely expected inclusion of Medicare prescription drug coverage will also boost overall health care spending down the line. Although this may not take effect until 2006, the best we can hope for in the short term is some slowing down of the pace of medical costs.
About the author: Mr. Pegg is managing director of Tocqueville Asset Management LP, the New York City-based investment advisory firm which serves businesses, institutions and private individuals.