On the relentless rise in healthcare spending, price vs. utilization, and what employers should do about it | A conversation with Katie Martin, M.P.A.

Katie Martin, M.P.A., president and CEO of the Health Care Cost Institute, discusses the organization’s annual cost and utilization report that was released on Oct. 13. The report shows that among those covered by employer-based health insurance, healthcare spending grew by 18.8% from 2019 to 2023 and that price, not utilization, was the main reason for the increase.

Could you provide a thumbnail of the Health Care Cost Institute and explain how you prepared this report?

The Health Care Cost Institute is a nonprofit, nonpartisan organization. Our mission is to use data and analytics to make the U.S. healthcare system work better. We do that in a number of ways, and one of the key ways we do it is by conducting research and analytics, such as the healthcare cost and utilization report. We have a unique data set of 30 million covered lives of people who get insurance through work, and that allows us to see healthcare spending in a unique way, particularly focused on people with employer-sponsored insurance.

And the report you issue annually is your big picture.

That's correct.

The takeaway makes me think of that famous 2003 article by Uwe Reinhardt titled “It’s the Prices, Stupid.” You looked at healthcare spending among people with employer-sponsored insurance from 2019 to 2023, and they went up by roughly 19% during the five years the report covers, and the driving force behind that increase was not utilization but price. So, I guess I'm wondering if this is an old story in some respects. Nothing wrong with revisiting old stories, but isn’t this confirming an established truth about American healthcare?

I think that's a good way to think about it. It is our 15th anniversary. I recently went back to our very first healthcare cost and utilization report, and the top line was it’s prices, not utilization, that are causing healthcare costs to go up. I liken it to that old expression: The more things change, the more they stay the same. So it may be that prices are going up in different ways than they used to, but it is, in fact, prices. I think it is a truism about American healthcare. I particularly think it's a truism about commercial insurance that is different from Medicare or Medicaid, where we negotiate the price for our healthcare services. That’s unique to the U.S. That’s unique to commercial insurance. And when that happens, it appears that the prices that are negotiated drive the costs and spending.

Is that surprising or new? No, I think the persistence, maybe, is what is important — that we just haven’t been able to tackle it in all these years.

There is a little kink in that trend in this report. I think there were a couple of years when there was a spike in utilization.

You’re right. In 2020, there was a dip in spending overall, and that was caused by a decrease in utilization, and in 2021, use rebounded. But still, price contributed more to spending than utilization, even in that year.

What I find most interesting about COVID[-19] is that the real decrease in spending is concentrated in the two to three months, really at the beginning of the pandemic when the world shut down. And then, what's equally striking is how quickly that trend line rebounded to normal. We only really saw a diversion from our historical trend for this brief period, where people literally could not go to the doctor.

But even later in 2020, the price trend and spending trend went right back to where they had been prepandemic.

Given that it’s price and not utilization that drives spending, at least among those covered by employer-based insurance, what does that say about all those value-based care efforts aimed at keeping people out of the hospital? Your report says that at least as far as people covered by employer-based insurance are concerned, inpatient care is a relatively small fraction of the spending, about 16%. Are all of those efforts tilting at the wrong windmill?

There are two responses. Hospital spending altogether is 46% of the healthcare dollars that we spend — that’s inpatient and outpatient combined. So, I think the decrease in use of inpatient is encouraging and suggests the movement out of high-price, high-intensity settings into lower ones.

The second point I would make is that even though use is not driving spending, it is a worthwhile tool to address the price problem. Here's what I mean by that. The same service costs more in an outpatient hospital department than in a physician's office. So, if we can get people to use services in physician offices more than they use services in hospital outpatient departments, you will have a downward impact on price because people are choosing lower-priced care. It's impossible to fully separate out price and use. They interact in that way, so I still think there’s opportunity for initiatives like value-based care to get folks to use lower-cost, equal- or higher-value care.

Certainly, trying to get people to use fewer services overall would not lead us to the situation of bending the cost curve the way we would need to.

The report breaks down healthcare services into four categories: inpatient, outpatient, professional services and prescription drugs. And one quick look shows that during this 2019-to-2023 period, the prescription drug increase is the largest: $460 per person. I'd be interested in your thoughts on that, and I think you have a discussion about whether that 460 figure might be somewhat misleading because it’s a list price; it doesn't take into account rebates. But it does seem that, during that period, prescription drug costs are increasing the most.

You’ve captured the issue exactly right, which is [that] we have gross prices, and we can’t account for rebates, and if we did account for rebates, the trajectory would be a little bit lower but still would be growing very quickly. It is the case that what we observe in our data is the money that exchanges hands. All of the prescription drug gross price is money in the system, whether some of that gets returned by way of rebates or coupons. It is still an important driver. It is still growing the fastest. There are remarkable advances in technology and therapeutics that are life-changing for people, but those are coming at a higher and higher cost.

There was another figure I saw in the inpatient spending: roughly a 50% decline in money spent on musculoskeletal services. If I were in charge of orthopedics at a hospital, I’d be very worried about that number. But it stood out to me as one of the largest percentage changes I saw. Did that number stick out to you in the way it did to me, and what accounts for it?

Yes, and, in fact, we saw a similar trend in the last report, and I asked the team to go through it several times because I was so surprised by it.

I think what's happening is that a lot of those services are moving to the outpatient sector. We just started a study on this question specifically because it stood out to see if we can understand what’s going on. Are those services moving from inpatient to outpatient? If you’re the head of orthopedics at a hospital that has both inpatient and outpatient services, you might not be as concerned, but that’s a question we'll try to answer empirically, as opposed to whether they’re moving to ambulatory surgery centers or other outpatient settings. It is certainly one of the most striking trends that we observed.

My guess, which, to be clear, is not data-based, is that those services are just moving to the outpatient department. I imagine it [may be because] of CMMI [CMS’ Center for Medicare and Medicaid Innovation] models and CMS initiatives to really change the cost of care. I think some of the value-based care initiatives have been very effective there.

I think there's an interesting story to be told, and we have more work to do to understand it.

It seems like the proportion of employee out-of-pocket spending to health plan spending hasn’t changed that much. We’re talking 2019 to 2023, which seems almost prehistory, but there has been a lot of discussion about more high-deductible plans and greater cost sharing.

I think there are a couple things going on there. So one is that that measure of out-of-pocket spending is basically all of us who get insurance through work, the amount that we’ve paid out of pocket divided by all of us who get insurance through work. If I didn’t have any out-of-pocket costs, and you had a lot. We averaged them out together, and so I think some of it, some of the consistency that you’re observing, which is exactly right, is the law of large numbers. The total pot of out-of-pocket spending hasn’t changed very much, and it probably doesn’t speak super directly on an individual-by-individual basis.

Importantly, there are also very real limits to how much people are allowed or required to pay out of pocket. The current law has out-of-pocket maximums and deductible limits, and my guess is that those are having some effect as well. There’s just a ceiling of out-of-pocket costs that people can't go through.

Over the years, we've been asked to look at out-of-pocket spending on particular services and to try to show the distribution. People have been looking for a big blockbuster number. My conclusion is the highest end is really right up against that out-of-pocket max. It’s very protective of people and their out-of-pocket costs. That doesn't mean that people can easily afford what that out-of-pocket max is or the deductible. The pain that people are feeling, the financial crunch, is very real. But I think that explains why that proportion has not changed dramatically.

This is another area where, year over year, every year we put out this report that actually doesn’t change very much either. That proportion stays pretty consistent.

I think I read in a footnote that of the population that’s covered, a quarter are nonusers of healthcare. Right? Are those just the healthy young bucks and does among us?

That’s a lot of it. We have a specific study not on this, not from 2019 to 2023, but from ’18 to ’22, that looks at this specifically. It tends to be younger folks. It tends to be men, not women. But it’s not very concentrated in that way. There are some nonutilizers across the board. I don't know about you, but as I get older, my need for the healthcare system increases quite a bit.

I think among the older population, it is fair to wonder what’s going on there. Who is not using healthcare? Is it someone who is super, super healthy, or is it someone who works a few different jobs and doesn’t have time, or is it someone who is deterred by the out-of-pocket costs and just feels like they can’t make it work?

We've talked about the fair amount of consistency in these reports — that is, price, not utilization, drives costs. In your experience with these reports, what stood out about this report is something that does differ from previous reports and previous patterns.

I think the consistency is the news, and one of the things we grapple with, or I grapple with personally, is how many times are we going to say that hospitals make up nearly one out of every two dollars of the spending? I’m constantly challenging myself to think about how to talk about that differently or what additional or different information to provide. We’re on a quest for that.

But I also am struck by policy conversations at the beginning of the year that were questioning whether we need insurance at all in the United States and whether we have a cost problem and who’s responsible for it, and some of that felt like maybe we need to go back and we need to say every year, "You need to look at hospitals, you need to look at the trajectory of prescription drug spending, and it’s the prices."

One point of clarification: You said one out of every two dollars is spent on hospitals. When you reference hospitals, you're lumping inpatient and outpatient together?

I’m adding inpatient and outpatient together. Yes. And I happen to know from earlier studies, a portion of that professional spending is also on hospital care. We don’t call it out in this report, but that takes it over 50%. But in this particular report, inpatient and outpatient together account for 46% of the spending, because those are just the fees that go to the hospital.

Any care that you get in your doctor’s office, unless your doctor’s office has been acquired by your local hospital, is in the professional care bucket, not in the outpatient bucket, in this report.

Your report would be of highest interest, I think, to employers who are paying these bills, their TPAs [third-party administrators], and, if they’re insured, their health insurers. There’s a lot of talk about the cost of healthcare and the burden on employers. What should they do with this report? What should the message be here?

I think there are three messages. One is the pain that you’re feeling and experiencing when you go into your finance meetings and your HR meetings [is] real. It’s validated by the data. It is getting more expensive. The burden that you’re feeling is reflected in the numbers. That should be somewhere between reassuring and infuriating.

The second is that we’re counting on you. You are in a unique position to lower costs, TPAs in particular, but employers, by way of their TPAs, to actually negotiate the prices down. If the prices are the problem, we need actors that can bring the prices down, and employers are uniquely situated to do that. I acknowledge that is not what their day job is in most instances. They would rather focus on whatever they went into business to do.

Then the third is that if you want to make a dent, you have to look at where the dollars go. Hospitals are central to maintaining people's health and well-being. I want a robust hospital. I want protection for people who get sick. I want safe places for people to have babies. But they make up 46% of spending. If we’re going to make a dent in spending, we have to figure out where we can make changes in hospitals.