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Health care spending per privately insured person increased 7.4 percent in 2005, marking the third year that the cost trend hovered between 7 and 8 percent following double-digit trends in 2001 and 2002. Data for the first quarter of 2006 suggest continued stability. The trend for 2005 reflected increased growth in spending for hospital and physician care, offsetting a sharp drop in spending growth for prescription drugs. Hospital utilization trends accelerated, while price trends decelerated in 2005. In contrast to stable spending trends in 2005, premium trends continued to decline in 2006, likely reflecting the lagged effects of earlier years' slowing in cost trends and perhaps signaling a turn in the insurance underwriting cycle.

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Four and a half million Americans gained employer-sponsored health insurance coverage during 1997-2001, while nearly nine million lost coverage in the ensuing economic downturn (2001-2003), after population growth was accounted for. Macroeconomic trends affecting employment, job quality, and incomes drove most of the coverage changes, although key factors varied during the two periods. Take-up rates affected coverage, mostly reflecting the interaction of premium cost trends and labor-market tightness, but take-up also was influenced by the implementation of the State Children's Health Insurance Program (SCHIP) during 1997-2001. Coverage among low-income people was most affected by economic conditions and premium costs.

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This analysis examines how shifts in the age distribution of the U.S. population, reflecting both the aging of the baby-boom generation and increased longevity, will affect demand for hospital inpatient services during the next ten years. Over that period, aging will drive about 0.74 percent annual growth in use of services. Aging's effect on inpatient demand varies by medical condition, with the highest rates of growth in services most used by elderly patients. Even for those services, however, aging is a much less important factor than local population trends and changing practice patterns attributable to advancing medical technology.

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The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003 established regional preferred provider organizations (PPOs) as a new private-plan option for beneficiaries in the Medicare Advantage (MA) program, starting in 2006. Developing network-based Medicare products uniformly priced across statewide or multistate regions presents unprecedented challenges and opportunities for health insurers. We held discussions with local health plan and hospital informants in six of the twelve Community Tracking Study (CTS) communities to obtain their perspectives on key considerations in evaluating whether they can and will offer regional PPO products under the MA program.

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Health care spending increased 8.2 percent in 2004. This was virtually unchanged from 2003, which suggests that health care cost trends have stabilized. Hospital spending grew 10.1 percent in 2004, also virtually unchanged from 2003, reflecting a small increase in the hospital utilization trend and a small decline in hospital price inflation. Meanwhile, growth in prescription drug spending continued to fall as a result of slower growth in prices. Growth in health insurance premiums slowed again in 2005, likely reflecting earlier years' slowing in cost trends and signaling that a turn in the insurance underwriting cycle might be under way.

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Health care spending per privately insured person increased 7.4 percent in 2003. While lower than the 2002 increase, it still outpaced growth in the overall economy by a margin that exceeds the historical average. The trend for drug spending decelerated the most. Meanwhile, hospital spending grew 9 percent in 2003-1.8 percentage points less than the 2002 increase. This reflected a sharp deceleration in growth of hospital use, while growth in hospital prices accelerated for the sixth year in a row. The trend for health insurance premiums fell in 2004. Employers raised patient cost sharing for the third year in a row.

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Despite sluggish economic growth and rapidly rising health care costs, Americans' access to needed medical care improved between 2001 and 2003, especially among low-income children and adults, according to findings from the Center for Studying Health System Change's (HSC) nationally representative Community Tracking Study Household Survey. In particular, the proportion of low-income, uninsured Americans who reported going without needed medical care fell by 3.2 percentage points to 13.2 percent in 2003, and unmet medical needs for low-income children decreased to the point where income-related differences in access to care for children have disappeared. Nonetheless, about one in seven Americans reported difficulty obtaining needed care in 2003, and people reporting access problems increasingly cited cost as a barrier to care.

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Against the backdrop of a sluggish economy and rapidly rising health insurance premiums, the proportion of Americans under age 65 covered by employer-sponsored insurance fell dramatically from 67 percent to 63 percent between 2001 and 2003. Although the decline in employer coverage could have spurred a large increase in the uninsured, the proportion of Americans without health insurance did not increase significantly, according to findings from the Center for Studying Health System Change's (HSC) Community Tracking Study Household Survey. Expansion of public health insurance--including Medicaid and the State Children's Health Insurance Program (SCHIP)--forestalled a significant increase in the uninsured, as the proportion of the under-65 population enrolled in public coverage increased from 9 percent to 12 percent.

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Growing national attention to improving quality and patient safety is spurring development of quality-based financial incentives for physicians and hospitals. Health plans in particular are driving these pay-for-performance initiatives, according to findings from the Center for Studying Health System Change's (HSC) 2002-03 site visits to 12 nationally representative communities. For now, there is little standardization across plans in how quality improvement is measured, and incentive payments typically are modest in comparison with providers' total revenue. Nevertheless, today's nascent efforts can provide a foundation on which to build. Support from major plans and public and private purchasers, sufficiently large financial incentives properly aligned with base provider payment systems, and improvements in quality measurement can all help foster widespread provider acceptance and, ultimately, improvements in health care quality.

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A key component of the new Medicare reform law is an overhaul of Medicare managed care, including a strong emphasis on recruiting private plans--especially preferred provider organizations (PPOs)--to participate in the new Medicare Advantage program. Citing the popularity of PPOs for privately insured Americans, proponents have touted PPOs as critical to injecting more and better competition into Medicare. This study, based on findings from the Center for Studying Health System Change's (HSC) site visits to 12 nationally representative communities, explores the reasons for the strong growth in commercial PPO enrollment and examines whether PPOs--as currently structured--can add value to Medicare. The available evidence suggests that the PPO model will face challenges in achieving the policy goals set forth in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), including increasing benefits, improving quality and slowing cost growth.

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Surging growth in preferred provider organization (PPO) participation has been fueled by migration away from the undesirable features of health maintenance organizations (HMOs). While employers, consumers, and providers seem to know what it is they do not want from HMOs, the advantages offered by PPO design are not so clear. This is attributable in part to difficulties in determining what a PPO arrangement actually is. But it may also reflect a lack of strong evidence that PPOs control costs, provide active care management, or promote quality improvement.

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Blue Cross and Blue Shield (BCBS) health plans, which insure nearly one in three Americans, historically have operated as local, nonprofit or mutual organizations. However, since the mid-1990s, BCBS plans increasingly have converted to for-profit companies and merged with Blue plans in other states. State insurance regulators, charged with weighing the costs and benefits of conversions and mergers to consumers, often wrestle with the legal complexities of these deals, according to Center for Studying Health System Change (HSC) site visits to 12 nationally representative communities. Although state regulatory scrutiny has slowed the pace of conversions recently, conversion activity is likely to accelerate again as the political and regulatory landscapes shift and plans adapt conversion strategies. The limited evidence available from HSC site visits and conversion proceedings suggests that conversions and mergers have had neither significant negative nor positive effects on consumers.

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Although contract negotiations between health plans and providers have remained tense during the past two years, overt impasses have declined, according to findings from the Center for Studying Health System Change's (HSC) 2002-03 site visits to 12 nationally representative communities. The balance of power stabilized during the period, with providers, particularly hospitals, solidifying their dominant negotiating positions and securing concessions from plans in the form of significant payment rate increases and more favorable contract terms. Many plans have recognized and accepted their weaker position relative to providers, suggesting the recent lull indicates plans have found it in their interests to accommodate provider demands for higher payments, rather than resist them and possibly trigger a contract showdown. Though no immediate change is likely in this environment, there are emerging forces that could swing the power pendulum back toward plans.

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This Data Bulletin is based on data from the Milliman USA Health Cost Index (HCI) ($0 deductible), which is designed to forecast claims trends faced by private insurers and the U.S. Bureau of Labor Statistics' National Compensation Survey to track hourly compensation costs for nurses and Producer Price Index for general medical and surgical hospitals to track hospital prices. The HCI classifies spending on services performed in freestanding facilities in its hospital outpatient category, which is consistent with how insurers classify such services. Due to data limitations, the HCI includes spending for Medicaid and uninsured patients, which can cause HCI trends to differ from privately insured trends. The authors have adjusted the HCI estimates to remove the effect of distinct Medicaid hospital price trends. As with most economic data, the HCI is subject to periodic retroactive revisions.

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Health care spending per privately insured person increased 9.6 percent in 2002, a slight reduction from the 10 percent increase in 2001. This is the first time in five years that the spending trend did not accelerate. Nonetheless, health care spending grew nearly four times faster than the U.S. economy grew in 2002. Growth in hospital spending accounted for the largest portion of the overall increase (51 percent) for the second straight year. Moreover, hospital price inflation--which accelerated significantly in 2002--accounted for a larger share of hospital spending growth in 2002 than in 2001. Premium increases accelerated again in 2003, despite 2002's slight deceleration of the overall spending trend.

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OBJECTIVE: To examine the evolution of the Medicare HMO program from 1996 to 2001 in 12 nationally representative urban markets by exploring how the separate and confluent influences of government policy initiatives and health plans' strategic aims and operational experience affected the availability of HMOs to Medicare beneficiaries. DATA SOURCE: Qualitative data gathered from 12 nationally representative urban communities with more than 200,000 residents each, in tandem with quantitative information from the Centers for Medicare and Medicaid Services and other sources. STUDY DESIGN: Detailed interview protocols, developed as part of the multiyear, multimethod Community Tracking Study of the Center for Studying Health System Change, were used to conduct three rounds of interviews (1996, 1998, and 2000-2001) with health plans and providers in 12 nationally representative urban communities. A special focus during the third round of interviews was on gathering information related to Medicare HMOs' experience in the previous four years. This information was used to build on previous research to develop a longitudinal perspective on health plans' experience in Medicare's HMO program. PRINCIPAL FINDINGS: From 1996 to 2001, the activities and expectations of health plans in local markets underwent a rapid and dramatic transition from enthusiasm for the Medicare HMO product, to abrupt reconsideration of interest corresponding to changes in the Balanced Budget Act of 1997, on to significant retrenchment and disillusionment. Policy developments were important in their own right, but they also interacted with shifts in the strategic aims and operational experiences of health plans that reflect responses to insurance underwriting cycle pressures and pushback from providers. CONCLUSION: The Medicare HMO program went through a substantial reversal of fortune during the study period, raising doubts about whether its downward course can be altered. Market-level analysis reveals that virtually all momentum for the program has been lost and that enrollment is shrinking back to the levels and locations found in the mid-1990s.

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Private health plans' participation in Medicare was envisioned as a way to save taxpayers money and offer Medicare beneficiaries more choices and benefits. As enrollment grew, there were concerns about overpayments to some private health plans and wide geographic variation in plan payments. The Balanced Budget Act of 1997 (BBA) introduced significant payment changes and regulatory requirements for plans participating in the newly named Medicare+Choice (M+C) program. Since January 1999, scores of plans have reduced or ended their participation, disrupting coverage for more than two million seniors. While the BBA often is blamed for this turnabout, research by the Center for Studying Health System Change (HSC) indicates private market forces also played a key role in M+C's growing instability.

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Managed care plans--pressured by a variety of marketplace forces that have been intensifying over the past two years--are making important shifts in their overall business strategy. Plans are moving to offer less restrictive managed care products and product features that respond to consumers' and purchasers' demands for more choice and flexibility. In addition, because consumers and purchasers prefer broad and stable networks that require plans to include rather than exclude providers, plans are seeking less contentious contractual relationships with physicians and hospitals. Finally, to the extent that these changes erode their ability to control costs, plans are shifting from an emphasis only on increasing market share to a renewed emphasis on protecting profitability. Consequently, purchasers and consumers face escalating health care costs under these changing conditions.

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