Health-Care Costs Show Signs of Slowing Down
06/03/2003
Fewer Hospital Visits, Use of Generics Contribute to Lower Inflation for Care By BARBARA MARTINEZ
Staff Reporter of THE WALL STREET JOURNAL After accelerating for five years, inflation in the cost of health care is showing signs of slowing. The shift marks an unexpected turn of events, because it is being led by two of the most stubborn drivers of medical inflation: prescription drugs and hospital spending. The reasons include a loss of patent protection on some big brand-name drugs -- such as Claritin -- lower use of outpatient surgical services and stingier new health-insurance plans that force patients to pay more of their medical bills. The development shows that some employers, after suffering several years of rapidly rising health-care costs, are starting to have success with strategies to rein them in. New policies that shift costs to workers with higher co-payments, deductibles and premiums may be encouraging patients to cut back on care. In addition, benefit plans have developed programs to promote generic drugs and restrict the use of more-expensive brand-name medicines. "Medical inflation, in its broadest sense, is slowing," said John Cookson, an actuary at Milliman USA, an actuarial firm with one of the largest health-care practices in the U.S. He noted that "when real personal-income growth slows," as it began to in 1999, "health-care-cost trends also begin to slow three to five years later." The government's most closely watched inflation gauge, the consumer price index, is showing a surprising moderation in medical-cost inflation. The medical-care component of the CPI rose just 0.2% in April, following a string of similarly anemic price increases in the previous three months. For the three-month period ending in April, medical-cost inflation was running at a compound annual rate of just 2.1%, compared with 4.4% for the same period in 2002 -- but still more than five times as fast as the pace of price increases for all goods and services excluding the volatile food and energy categories. While the CPI measures changes in price only, health insurers disclose the change in total health spending, including both in price and the increase in the quantity of health services being bought. The early indications that health-care costs are slowing could reflect temporary conditions and health-care costs could begin to accelerate shortly. And the relief is so far too small to make an immediate difference in consumers' wallets. Even if health-care inflation is finally backing off, it is still expected to continue to rise at four or five times the rate of regular inflation over the next several years. At General Electric Co., where skyrocketing health-care costs are fueling efforts to increase workers' contribution to their health costs, moderation hasn't been felt, according to spokesman Gary Sheffer. He said health-care costs were up 14% in the first quarter of this year, compared with the year-ago period, even though the company implemented co-payment increases beginning Jan. 1. GE still expects a 15% increase for the full year 2003 and to remain at that level over the next few years, he says. Yet at one of the nation's largest health insurers, Aetna Inc., the first-quarter 2003 medical-inflation rate was 8% to 9%, a steep decline from a nearly 16% increase in the first quarter of 2002. Watching 2004 "After many years of acceleration, it is kind of a major shift," said John Rex, health-care analyst at Bear Stearns. He recently surveyed over 120 benefits managers at companies that pay for the health care of nearly five million workers and found that for next year, on average, those employers are expecting a 12.1% increase in health-care costs, down from the 12.7% they believe 2003 will come in at. He added that "2004 is a very important inflection point in that it could be the first year in some time where the rate of premium increases might be lower than the preceding year." UnitedHealth Group Inc., the largest health insurer, cautioned that the latest indicators aren't "sufficiently mature to suggest" that a permanent change has taken place. In a conference call with investors in April, the company's chief executive, William McGuire, attributed some of the moderation in health-care costs in the first quarter to "prolonged unfavorable economic conditions ... preoccupation with global conflicts" and "domestic security concerns," as well as "unusually harsh winter conditions and a very mild flu season." John W. Rowe, CEO of Aetna, disagreed with that assessment. "While these are convenient facts to point out," he said, "our detailed analyses indicate that the weather and flu are not important drivers of the recent moderation in medical-expense inflation." He said that data show prescription drug spending is slowing, as are hospital volumes and diagnostic testing. One of the most significant slowdowns has come from prescription-drug costs. Since the allergy medication Claritin lost its patent protection last November and became available without a prescription, spending on prescription antihistamines has slowed considerably. The use of hormone-replacement therapies also is way down since last year when a study showed that a popular hormone-combination pill raised the risk of heart attacks, strokes and blood clots. Prescriptions for the hormone combination Prempro plummeted to 553,000 in April, down 71% from 1.8 million a year before, according to NDCHealth, a prescription tracker in Atlanta. And Lipitor, a cholesterol-lowering drug that is the best-selling prescription drug in the world, showed signs of slowing in the U.S. in the first quarter. An executive at Pfizer Inc., maker of Lipitor, told Wall Street analysts in April that the company doesn't fully understand the reason for the slowdown but believes higher drug co-payments and some companies' cutbacks in insurance coverage for retirees could be contributing factors. Prescription drugs overall are still growing. Prescription-drug sales in the U.S. grew 12% to $192.2 billion in 2002 from $172 billion in 2001, according to IMS Health, a pharmaceutical information and consulting company. But that growth is down from a 17% increase in sales in 2001 from 2000. One reason: a slowdown in the launch of new drugs. Drug makers rolled out just 17 novel drugs last year, the worst new-product performance since 1983 and a sharp decline from the 53 new drugs introduced in 1996. Broad Implications Meanwhile, events over the past several months at the two largest hospital chains point to a slowdown in hospital inflation, one of the largest portions of overall health-care costs. The country's two largest hospital owners have curtailed earnings projections recently. Though each company gave different reasons for their pullbacks, their experiences have implications for the entire hospital industry. In April, HCA Inc., the largest owner of hospitals, surprised investors when it announced that it would report first-quarter earnings below the company's expectations due in part to fewer outpatient surgeries and a weak flu season. Tenet Healthcare Corp. came under fire last fall for excessive hospital charges that effectively gouged the federal Medicare program. As a result, the second-largest hospital chain slashed earnings estimates for fiscal 2003 and 2004. According to hospital analyst John Hindelong of Credit Suisse First Boston, "anecdotal evidence" suggests that so far in the second quarter, "demand remains sluggish" at hospitals. In a note to investors, he reported that he expects "somewhat slower growth in admissions versus the last four years. The soft economy and higher co-payments may retard growth for a while" at hospitals.
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