Summary

The recent slowdown in health care spending growth stalled in the first half of 2004 as health care costs per privately insured American increased 7.5 percent during the first six months of 2004— virtually the same rate of increase as in 2003. Private-sector spending on health care constitutes more
than half of all health care spending, and both the private and public sectors are subject to similar cost pressures.

Growth in spending on hospital inpatient care slowed to 5.1 percent in the first half of 2004, while the trend for outpatient spending held steady at 11.4 percent. With hospital utilization continuing to grow at a slow rate for the second year in a row, hospital price increases—7.7 percent in the first half of
2004—accounted for much of the hospital spending increase.

Spending on prescription drugs increased 8.8 percent in the first half of 2004, similar to the increases in the first and second halves of 2003 and substantially below the peak increase of 19.5 percent in the second half of 1999.

Health care costs likely will continue to grow faster than workers’ income for the foreseeable future, leading to greater numbers of uninsured Americans and raising the stakes for policymakers to initiate some type of effective cost-containment policies or accept the current trend of rapidly growing health costs and gradually shrinking health coverage.

The main tool to control costs remains greater financial responsibility for patients. This could encourage consumers to use health care services more judiciously, particularly over time. However, the most common patient financial incentives are often too crude to allow distinctions between needed and more discretionary care, how efficient health care providers are, and how much of a financial burden some patients can afford. The result is a high potential of barriers to health care for people with low incomes or high medical needs.

Little attention is being paid to the most important long-term driver of health care costs—new medical technology and its enthusiastic acceptance into mainstream medical practice. Measures that can be taken to control this relentless force, such as greater adherence to evidence-based medicine, increased research on medical effectiveness, and greater use of technology assessments generally have received short shrift from policymakers. When the limitations in the extent to which patient financial incentives can be used become more apparent, policymakers may increase their interest in measures designed to improve efficiency in the health care system.