Health Care Cost Growth
Among The Privately Insured
Outpatient services and pharmaceuticals have been the key drivers of
by M. Kate Bundorf, Anne Royalty, and Laurence C. Baker
ABSTRACT: Controlling health care cost growth remains a high priority for policymakers
and private decisionmakers, yet little is known about sources of this growth. We examined
spending growth among the privately insured between 2001 and 2006, separating the con-
tributions of price changes from those driven by consumption. Most spending growth was
driven by outpatient services and pharmaceuticals, with growth in quantities explaining the
entire growthin outpatientspending and about three-quartersof growthin spending on pre-
scription drugs. Rising prices played a greater role in growth in spending for brand-name
than for generic drugs.These findings can inform efforts to control private- sector spending.
[Health Aff (Millwood). 2009;28(5):1294–304; 10.1377/hlthaff.28.5.1294]
high priority on cost containment, much remains unknown about the sources of
spending growth. In this paper we examine the contributions of changing prices
and changing quantities of prescription drugs and inpatient and outpatient ser-
vices to spending growth among the privately insured.
In many settings, health spending is composed of payments for identifiable ser-
vices or bundles of services. For example, physicians paid fee-for-service receive a
payment per allowable service, often defined by a Current Procedural Terminol-
ogy (CPT) code. Hospitals paid using diagnosis-related group (DRG)–based ar-
rangements receive a specified payment per patient admission. Under these types
of arrangements, it is possible to decompose spending growth into changes in the
type and quantity of services used and changes in the price paid per service. Un-
derstanding the extent to which recent changes in health spending are driven by
able for identifying effective cost containment strategies.
ver the past three decades, U.S. health spending per capita has
risen faster than inflation, from 7.2 percentto 16.2 percentofgross domes-
1 29 4Se p t e m be r/Octobe r 2009
O v e r v i e w
DOI 10.1377/hlthaff.28.5.1294 ©2009 Project HOPE–The People-to-People Health Foundation, Inc.
Studies decomposing spending growth into changes in quantities and prices
generally focus on Medicare spending for physician services. For example, a re-
cent study by the Congressional Budget Office (CBO) found that the 34.5 percent
physician services can be explained entirely by growth in utilization.2Another
study pointed out that the contribution of changes in prices and quantity to
prices playing the more important role in some specific areas.3
Outside Medicare spending for physician services, very little is known about
these issues. Patterns of change may be different in younger, privately insured
groups, because of differences in both patients’ characteristics and payers’ opera-
tions. The relative contributions of changes in prices and changes in quantities
may also differ for inpatient and pharmaceutical spending.
We studied changes in spending among a large group of privately insured pa-
tients covered by noncapitated employer health plans. We examined changes in
of overall spending growth.
Study Data And Methods
mercial Claims and Encounters Databases from Thomson Reuters (formerly
analysis focuses on the eight large U.S. employers from the databases that provided
data on plan enrollees in both 2001 and 2006 and that did not have sizable enroll-
ment in a capitated plan in either year. We limited our analysis to firms that pro-
vided data for both years, to minimize the possibility that changes in which firms
participated would lead to changes over time in the composition of plan enrollees.
plans frequently do not include complete information on patterns of use and do not
with sizable enrollment in either 2001 or 2006, to minimize the likelihood that pat-
tionofour study sample.4
Among those covered by the included firms, we restricted the sample to active
full-time and part-time workers and their dependents under age sixty-five who
were enrolled for the entire year.5The sample includes 663,307 enrollees in 2001
and 607,030 in 2006.6
is not necessarily representative of all privately insured Americans in every re-
spect. Details of possible discrepancies and similarities are described in an online
C o s tG r o w t h
H E A LT H A F FA I RS ~ Volum e 28, Num be r 5
1 29 5
?Methods. For each person in the sample, we identified all claims in the data-
base with a service date in the given year. For each claim, we recorded the amount
received by the provider, including payments from the insurer as well as the em-
ployee. This differs from an amount that may have been charged by a provider, in
that it reflects, among other things, contractual discounts and other adjustments
made by payers before bills are paid. Using the claims data, we developed measures
Inpatient admissions. The unit of service for inpatient services is the admission.
pital admission, including hospital claims, physician claims, surgeon claims, and
claims from independent labs.8We considered two admissions to be for the same
service if they had the same diagnosis-related group (DRG) code. We defined the
sum of all payments associated with the admission as the price. When one is inter-
preting our analyses, it is important to consider that admissions comprise many
different services. We consider the implications of changes over time in the com-
position of services within an admission for our findings.
Outpatient services. Outpatient services include claims for services that were re-
cian services performed in an outpatient setting and facility claims. Claims for
physician services generally include a corresponding CPT code indicating the
fied the unit ofservice separately for three types ofoutpatient services7: physician
services, nonphysician professional services, and facility and agency services.
Whenexaminingoutpatientspendingasa whole,weincludedeach ofthesethree
types of units of service in the analysis.
its of the eleven-digit National Drug Code (NDC). The nine-digit NDC identifies
the labeler (the firm that manufactures or distributes the drug) and the product
(the specific strength, dosage form, and formulation). In some analyses we differ-
entiated between claims for brand-name and generic drugs, based on the NDC.
change in spending attributable to changes in quantity as the average price per
to each factor, we divided the change attributable to each factor by the total
change in per capita spending over the time period.9
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O v e r v i e w
We present most of our results in real terms, adjusting for inflation using the
gross domestic product (GDP) price index produced by the U.S. Bureau of Eco-
nomic Analysis; dollar amounts are in 2006 dollars. The index values are 102.402
and 116.676 for 2001 and 2006, respectively.10Unless otherwise specified, we re-
port all findings in age- and inflation-adjusted 2006 dollars.
an annual growth rate of 5.8 percent (Exhibit 1). Across the categories of spend-
ing, annual growth rates of nominal spending ranged from 2 percent for inpatient
admissions to 8.1 percent for pharmaceuticals. In addition, rates of growth varied
by subcategory within each category of spending.11
Exhibit 1 contains estimates of growth in real spending, which adjust nominal
expenditures using the GDP deflator. In real terms, spending growth over the pe-
C o s t G r o w t h
H E A LT H A F FA I RS ~ Volum e 28, Num be r 5
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Spending Per Health Plan Enrollee, Total And By Type Of Service, 2001 And 2006
Nominal (unadjusted) dollars
Total2,685 3,46229.0 5.8
Inpatient admissions 680747 9.82.0
Facility and agency
Real (2006) dollars
Total 3,0593,462 13.2 2.6
Inpatient admissions775 747–3.6–0.7
Facility and agency
SOURCE: Medical and pharmacy claims from eight firms in the MarketScan database produced by Thomson Health Care.
NOTES: All figures were age-adjusted by applying the age distribution of the 2006 sample to the 2001 sample. Expenditures
within service categories do not add to the total because of missing data for provider type for outpatient services and for the
indicator of brand-name or generic drugs. Missing data by category represent 6-8 percent of outpatient spending and 3–4
percent of drug spending.
estimates we present are in real terms—that is, adjusted for inflation.
for pharmaceuticals (4.6 percent annual growth rate) followed by outpatient ser-
vices (3.4 percent annual growth rate). Real inpatient spending per capita de-
clined slightly between 2001 and 2006. Because ofthe differential rates ofgrowth,
maceuticals represented an increasing proportion (22 to 24 percent) of total
spending per capita. Within pharmaceuticals, brand-name drugs represented a
creasing proportion. Overall growth in outpatient spending represented approxi-
matelytwo-thirdsoftotal growth,whilegrowth inpharmaceutical spendingrep-
resented approximately one-third.12
pita spending varied across the different types of services (Exhibit 2). The in-
crease in outpatient spending, representing the largest portion of the spending
growth, was driven almost entirely (99 percent) by an increase in the quantity of
services per enrollee.13The relatively small decline in inpatient spending per
enrollee (61 percent of the total decline) and a decline in the price per admission
enrollee was driven primarily by an increase in the quantity of drugs per enrollee
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Contributions Of Changes In Prices And Changes In Quantities To Changes In Per
Capita Spending In A Privately Insured Sample, By Service Type, 2001–2006
SOURCE: Authors’ analysis of 2001 and 2006 MarketScan Commercial Claims and Encounters Databases (Thomson Reuters).
aPrice contributed less than 1 percent.
Change in spending, 2001–2006