updated 12/2/2004 11:45:17 AM ET 2004-12-02T16:45:17

The slowdown in the growth of health care spending leveled off earlier this year after two years of declines, a new study found, with the cost of treating a privately insured American rising 7.5 percent in the first half of 2004 _ virtually the same as the 7.6 increase in 2003.

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Paul B. Ginsburg, co-author of the study, worries that the flat spot could be a pause before the rate of spending increases will once again start to grow as programs designed to contain costs are failing to have a significant impact. Even if the rate of increase doesn't jump dramatically, he said, it is still at a dangerous level which outpaces inflation and could eventually lead to more employers dropping health coverage.

"We have leveled off at a place that is problematic," said Ginsburg, president of the Center for Studying Health System Change, which conducted the study with the Employee Benefit Research Institute. "There is just not much optimism that we know how to control costs."

Health care spending growth slowed in both 2002 and 2003 after reaching 10 percent in 2001. Ginsburg said the surge in 2001 was partially a reflection of the end of strident managed care policies which kept costs in check. Programs and policies that shift a greater burden of the health care costs to employees helped moderate spending growth in 2002 and 2003. But Ginsburg said cost shifting can only accomplish so much because employees will drop coverage if they can't bear the expense.

Unlike other studies, this one measures what is paid to providers such as hospitals and doctors instead of health care premiums paid by employers to purchase coverage. Some studies measuring premiums have showed a continued decline in the growth rate.

For instance, a study released last month by Mercer Human Resource Consulting found that this year the average premium rose 7.5 percent, down from last year's 10.1 percent increase. Employers expect premiums to rise 7 percent next year _ if they make some changes in the plans they offer. If not, they anticipate a 10 percent increase.

Ginsburg and others noted it will be very difficult to keep premium increases down if spending continues to rise. Spending accounts for the greatest portion of the premium, which also includes payments for administrative services and a profit margin. Additionally, experts say too much of the slowdown in premiums are a result of demanding employees pay more for services through higher charges to see the doctor or purchase drugs. Richer benefit packages have higher premiums.

"The problem is employers are addressing premium costs but we still need to address the underlying costs of health care delivery," said Barry Barnett, a health care consultant at PricewaterhouseCoopers LLP.

Spending on hospital outpatient services again rose the most, 11.4 percent, after having the biggest jump last year. Hospital inpatient services rose 5.1 percent, the smallest jump in the study. When the two are combined, hospital spending rose 8.6 percent, virtually the same as in the second half of 2003 and down from the 9.1 percent hike in the first six months of that year.

The hike in spending on hospitals primarily stems from price increases, not utilization. Hospital prices rose 7.7 percent in the first six months of 2004 while utilization increased 0.8 percent, the study found

"Hospital prices are a real problem area," Ginsburg said. "They are making up for a time when they got squeezed from managed care."

Hospitals are also charging private payers more to compensate for skimpy payment rates form Medicare and Medicaid.

The study points out that hospitals' profit margins rose to 4.8 percent last year, up from 4.2 percent in 2002.

But Caroline Steinberg, vice president for trend analysis at the American Hospital Association, said that margin reflects gains from non-operating revenue such as investments. She said hospitals' operating margin, fell to 3.3 percent last year, from 3.7 percent in 2002.

Steinberg said hospital costs are rising because technology is getting more expensive and patients are often older and sicker than they were in the past. She added that it is unfair to blame hospitals for the jump in outpatient services' spending because the data also includes information from for-profit clinics and surgery centers.

And while she doesn't deny that hospitals shift cost to private insurers, Steinberg said it doesn't seem to be hurting their performance. Indeed, on Wednesday Humana Inc. on Wednesday said earnings for 2004 will come in at the high end of its previous forecast, the second time in a month the company has raised its full-year outlook. Earlier, in the week Cigna Corp. rose it earnings guidance for this year and next.

Prescription drug spending rose 8.8 percent, slightly lower than the 9.6 percent increase in the second half of 2003 and virtually the same as the 8.5 percent increase in the first half of 2003. During the first half, drug prices increased by 3.1 percent.

Spending increases on drugs has dropped dramatically since 2000 and 2001 reflecting greater use of cost sharing which push consumers to choose less expensive generic medications instead of pricey brand names. Drug utilization also fell reflecting a decline in the number of new drugs approved for sale and the presence of some wildly popular medications such allergy treatment Claritin, available over the counter.

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