Hospitals bent the cost curve in the 90’s

Hospital Expenditures and Physician and Clinical Expenditures are the two largest categories of the NHE (National Health Expenditure), comprising 51% in 2010. Intriguingly, while these cost categories have been growing rapidly from 2000 to the present, we seemed to do an excellent job during the 90’s of bending the healthcare cost curve in these two categories. If only we knew how we did that.

This post looks at the growth rates of these big cahunas of healthcare, and is a continuation of our quest to understand the growth of healthcare costs.

Largest healthcare cost categories

Hospital expenditures describe the money we as a nation spend on healthcare associated with hospitals. This cost category is defined to include “revenues received [by the hospital] for all services provided in hospitals to patents. Thus it includes revenues received to cover room and board, ancillary services such as operating room fees, inpatient and outpatient care, services of resident physicians, inpatient pharmacy, hospital-based nursing-home care, hospital-based home health care and fees for any other services billed by the hospital such as hospice” (Ref 1,2).

Physician and clinical expenditures include expenditures on services rendered in the offices of certain types of healthcare professionals. This category includes “revenues from services in offices of physicians, and outpatient care centers, plus the portion of medical and diagnostic laboratory services that are billed independently by the laboratories” (Ref 1,2).

Big and growing share of GDP

Hospital expenditures (blue) and Physician / clinical expenditures (red) have been growing as a percentage of GDP (the measure that scares everyone).

Since these two categories comprise a large fraction of overall healthcare costs, and  consume increasingly large portions of GDP, any attempt to control the growth of healthcare costs needs to address these expenditure categories.

Opportunity for deeper analysis:

BUT, notice that there have been periods when this growth flattened out. And hospital expenditures actually declined as a share of GDP during the 90’s. Clearly, during the ’90’s something interesting was going on regarding cost containment in these two dominant healthcare expenditure buckets. Since the early 2000’s growth as a share of GDP has resumed in both these categories, especially in the case of hospital expenditures.

Hospital share of healthcare costs shrink

Here are the same expenditure buckets, shown this time as a fraction of total healthcare costs. This graph clearly shows hospital expenditures declining (as a share of overall health expenditures) since a peak of 40% in the early 80’s.

Real, per-capita hospital costs were stable in the ’90’s

As with earlier posts, I find the real, per-capita growth rates an informative metric, because it corrects for inflation and for population growth (effects that mask underlying trends). This graph zooms in on the period after 1980.

• We see an actual flat curve (linear scale) for hospital expenditure throughout the ’90’s, with a similar but less pronounced effect for physician and clinical expenditures.
• In other words, the real, per-capita costs of hospitals during the ’90’s were constant. Whatever we did there seems to work. Unfortunately since the end of the ’90’s real costs are growing again.
• I don’t yet know the cause of this effect. I remember that during this period we were spending a lot of innovation energy inventing new ways to take complex open surgical procedures and turn them into minimally invasive procedures that took less time and had reduced complication rates. Perhaps that is a contributing cause? Comments anyone?
• Accompanying this was a shift of procedures from the hospital into free standing surgicenters and other lower cost locations, made feasible because of the lower complication rates of minimally invasive procedures. Perhaps this explains some of the apparent transfer of costs from hospital expenditure bucket to the physician bucket in the second half of the 80’s?
• In addition, there was the shift to DRG based reimbursement, in which payment for hospital services was tied more to specific episodes of care than it had been in the past, and less to the old fashioned fee-for-service model.

Hospital cost growth accelerates after 2000

Remember, cost growth is not necessarily bad. What matters is the relative growth compared to GDP. Here are the actual growth rates*.

• During the 1990-2000 period, hospital costs were not the “problem”. In fact growth rates of hospital expenditures were lower than growth rates in GDP, and lower than the overall growth rates for NHE (total healthcare expenditures).
• However, Hospital costs grew faster than total NHE in the last decade, implying they are now a very important cause of overall healthcare cost growth (they are a big portion and a fast growing portion).
• In the recent decade the challenge of escalating health costs was made worse by a rather low GDP growth rate!

Conclusions

1. Hospital expenditures and Physician and Clinical expenditures have typically been growing faster than GDP, and because they are such a big share of costs, they are a major factor in excessive healthcare cost growth.
2. BUT, during the 90’s, hospital costs especially grew quite slowly, and in fact grew slower than GDP. If we understood why that was and could apply those lessons elsewhere that would be important.
3. Physician and clinical expenditures also had a slower growth phase in the 90’s, just not quite as pronounced as in the case of hospital expenses.

* Note: Growth rates are from curve fitting and represent the trend growth rate for the period.

References

1. US National Health Expenditure Accounts. Published by the US Department of Health and Human Services. Overview and description available at Centers for Medicaid & Medicare Services. Data downloads available here.
2. National Health Expenditure Accounts Methodology Paper, 2010  [PDF warning]).