Eighth Annual Wall Street Comes to Washington Conference

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

2. 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

3. 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

4. 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)

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

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

12. 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

13. HSC Wall Street Comes to Washington