U.S. employer-covered healthcare costs: It’s still the prices

In 2003, Princeton health economist Uwe E. Reinhardt and his colleagues published what is now a famous article in Health Affairs with the punchy title, “It’s the prices, stupid: why the United States is so different from other countries.” The gist of the article is that U.S. healthcare costs are high because of prices, not because Americans are exceptionally heavy users of healthcare.

Today’s report by the Health Care Cost Institute (HCCI) sends the same basic message. Healthcare spending by people in the U.S. who are covered by employer-purchased health insurance increased by 18.8% in the five-year span 2019 to 2023, according to the report, with prices increasing 17.7% and utilization by 1.8%. In absolute dollars, annual spending per person in the employer-insured market grew from $5,676 in 2019 to $6,743 in 2023.

“I liken it to that old expression: the more things change, the more they stay the same,” said Katie Martin, president and CEO of HCCI, a nonprofit supported by insurers and foundations that has assembled a data set of 30 million people covered by employer-based health insurance. Martin said she recently went back to look at the organization’s first cost and utilization report. “The top line was its prices, not utilization, that are causing healthcare costs to go up.”

The report issued today ends with data for 2023 because of the time it takes to collect, validate and analyze employer claims data.

Although the report shows that spending on prescription drugs rose the fastest among four categories of spending — professional services, inpatient care, outpatient care as well as prescription drugs — during the period the report covers, Martin emphasized that close to half, or 46%, of the spending was on services provided by hospitals (the inpatient and outpatient categories combined).

“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 $2 of healthcare spending,” Martin said in an interview with Managed Healthcare Executive.

The truism about price having an outsize role in U.S. healthcare spending is especially salient in employer-based insurance because employers, through insurers and third-party administrators, negotiate prices with hospitals and other providers, Martin observed.

“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 of it as the conclusion of this report maybe is what is important — that we just haven't been able to tackle it in all these years yet.”

The report covers the period of the COVID-19 pandemic. The report shows an unusual dip in spending from 2019 to 2020, from $5,676 to $5,482, as the use of healthcare declined, but even then, Martin said, price more than utilization dominated the cost of healthcare.

“What I find most interesting about COVID is that the decrease in spending is concentrated in the two to three months really at the very beginning of the pandemic when the world shut down. And then, what’s equally striking is how quickly that trend line rebounded to normal,” Martin. Annual per person spending jumped 13.3%, from $5,482 to $6,214, from 2020 to 2021.

Three messages for employers about healthcare costs

Martin said the HCCI says she has three messages for employers based on this year’s cost and utilization report.

It’s not baloney

The extra burden and financial drag from healthcare costs that employers say they are experiencing is genuine, said Martin. “It’s real. It's validated by the data. It is getting more expensive, she said. And that “should be somewhere between reassuring and infuriating.”

You can do something about it

Through their negotiating power, employers and third-party administrators that administer health plans for self-insured employers can work to bring prices down. “We need actors that can bring the prices down, and employers are uniquely situated to do that,” said Martin, acknowledging that healthcare is “not what their day job is in most instances” and that employers would rather focus on whatever they went into business to do.

You’ve got to tackle hospital spending

In a variation of “follow the money,” Martin said, “you have to look at where the dollars go.” She lauded hospitals. “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,” she said. But she repeated that hospitals make up 46% of the healthcare spending by those covered by employer-based health insurance. “If we're going to make a dent, we have to figure out where we can make changes in hospitals,” Martin said.