The Costs of Caring: Sources of Growth in Spending for Hospital Care July 2005.

The Costs of Caring:Sources of Growth in

Spending for Hospital Care

July 2005

2

Medical breakthroughs in medicine have contributed to longer lives…

50

55

60

65

70

75

80

Source: Centers for Disease Control and Prevention, National Vital Statistics Reports, vol. 53, no. 6, November 10, 2004

Chart 1: Average Life Expectancy in the United States1940 – 2002

Avera

ge L

ife E

xpect

ancy

in

Years

20001940 1945 1950 1955 1960 1965 1970 1975 1980 1985

1990 1995

3

$1,151$1,222

$1,310$1,426

$1,559$1,679

$0

$400

$800

$1,200

$1,600

$2,000

1998 1999 2000 2001 2002 2003

Source: Centers for Medicare and Medicaid Services, Office of the Actuary

Chart 2: National Health Expenditures (in Billions of Dollars)1998 – 2003

In B

illio

ns

…but rising national health expenditures have raised concerns.

4

Source: Centers for Medicare & Medicaid Services, Office of the Actuary

Prescription Drugs

Hospital Care

Nursing Home Care

Home Health Care

-7%

13%

33%

53%

73%

93%

113%

1999 2000 2001 2002 2003

Spending on hospital care has lagged in growth compared to other health services…

Chart 3: Cumulative Percentage Growth in National Health Expenditures, by Category 1999 – 2003

Physician Services

Cum

ula

tive P

erc

enta

ge G

row

th (

from

19

98 v

alu

es)

5

…but still represents the largest component of total growth in health care spending.

* “Other” includes dental and other non-physician professional services, other medical durables and non-durables, government public health activities, and other personal health care

Share ofSpending Growth

Source: Centers for Medicare & Medicaid Services, Office of the Actuary

Hospital Care - 28%

Physician Services - 23%

Prescription Drugs - 18%

Nursing Home Care - 4%

Other* - 15%

Home Health Care - 1%

Admin. & Net Cost of Priv.Health Insurance - 11%

Hospital Care - 32%

Physician Services - 23%

Prescription Drugs - 11%

Nursing Home Care - 7%

Other* - 17%

Home Health Care - 3%

Admin. & Net Cost of Priv.

Health Insurance - 7%

Share ofSpending

Chart 4: Share of Spending by Category, 2003 vs. Share of Spending Growth by Category, 1998 – 2003

6

Chart 5: Key Components of Hospital Costs of Care

Volume, intensity, and the rising costs of purchased goods and services contribute to increases in spending for hospital care.

Number of Services Pro

vided

Cost

s of

Goods

& S

ervi

ces P

urchased

TechnologyOther

OtherGoods &Services

LaborCosts

UseRates

PopulationHospitalCosts ofCaring

Intensity of Care

Aging

Acuity

7

Chart 6: Share of Hospital Cost Growth Explained by Number of Services Provided,

Costs of Goods and Services Purchased, and Intensity of Care1998 – 2003

The most important current driver is the rising costs to hospitals of the goods and services purchased to provide care.

Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1998 – 2003, for community hospitals; Centers for Medicare and Medicaid Services, Office of the Actuary; Medical Expenditure Panel Survey

Intensity of Care- 5%

($7 B)

Number of Services Provided

43%Costs of Goods and Services

($67 B)

($55 B)Purchased52%

8

-11%

15% 10%

52%

56% 38%36%

33%

59%

39%47%

53%64%

5% 3%

-20%

0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003

Chart 7: Trends in Share of Cost Growth: Costs of Goods and Services Purchased, Number of Services Provided, and Intensity of Care

1999 – 2003

Costs of Goods and Services Purchased

Intensity of Care



In past years, the increase in the demand for care has played a larger role.

Perc

en

t of

Gro

wth

Att

rib

uta

ble

to

Each

Fact

or

9

Source: CPI Data from Department of Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers - (CPI-U), U.S. City Average; Hospital Market Basket data from Centers for Medicare and Medicaid Services, Office of the Actuary

0%

2%

4%

6%

1999 2000 2001 2002 2003

The prices of goods and services purchased by hospitals have risen faster than more general measures of inflation.

Chart 8: Average Annual Percent Change in the Consumer PriceIndex (CPI) and Hospital Market Basket

1999 – 2003

Hospital Market Basket

CPI

Avera

ge A

nnu

al Perc

ent

Chang

e

10

Chart 9: Share of Cost Growth Explained by Key Components of Hospital Costs1998 – 2003

All Other – 8.0%

Prescription Drugs – 3.1%Prof. Liability Insurance – 0.3%

Professional Fees – 2.9%

Wages & Salaries/Employee Benefits – 37.7%

Between 1998 and 2003, growth in hospital salaries and benefits was the greatest single factor driving up the cost of hospital care.


Costs of Goods and Services

Purchased52%

($67 B)

11

8.1%

7.4%

6.7% 6.7%

5.4%5.0%

RegisteredNurses

Pharmacists LPNs NursingAssistants

ImagingTechnicians

LaboratoryTechnicians

Chart 10: Vacancy Rates for Hospital Personnel2004

Hospitals continue to face workforce shortages in key clinical professions…

Source: American Hospital Association 2005 Survey of Hospital Leaders

Vaca

ncy

Rate

12

… resulting in rising wages and benefits for caregivers and others.

7.0%

4.4%

6.4%5.6%

3.2%

4.9%

0%

2%

4%

6%

8%

1998 1999 2000 2001 2002 2003

Annual Perc

ent

Change

Chart 11: Average Annual Rate of Change in Total Cost Per Hospital FTE1998 – 2003

Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1998– 2003, for community hospitals

13

Chart 12: Factors Influencing the Number of Services Provided1998 – 2003

Both a growing population and more hospital use per person have contributed to higher service volume.



43%

($55 B)

Population

Growth16%

Use Rates27%

14

Our growing and aging population…

Pop

ula

tion (

in m

illio

ns)

Chart 13: Projected Population Growth, by Age Cohort2000 – 2050

Source: U.S. Census Bureau, Population Division, Population Projections Branch, Projected Population of the United States, by Age and Sex: 2000-2050

0

100

200

300

400

500

2000 2010 2020 2030 2040 2050

Aged 20-44

Aged 45-64

Aged 65+

Aged 0-19

15

Chart 14: Per Capita Personal Health Care Expenditures and Per Capita Discharges in

Short-Stay Hospitals*, by Age Cohort1999

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Accounts data, 1999, December 2004; National Center for Health Statistics, Centers for Disease Control and Prevention, Health, United States, 2004

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Ages 0-18 Ages 19-44 Ages 45-54 Ages 55-64 Ages 65+0

0.05

0.1

0.15

0.2

0.25

0.3

Per capita personal health care expenditures Per capita discharges in short-stay hospitals

Per

Capit

a P

ers

onal H

ealt

h

Care

Expend

iture

s

Per

Capit

a D

isch

arg

es

inSh

ort

-Sta

y H

osp

itals

* Data on Discharges in Short Stay Hospitals is for ages 0-17, 18-44, 45-54, 55-64, and 65+

…is contributing to increased per capita hospital use, higher health care expenditures,…

16

Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1980 – 2003, for community hospitals

100

200

300

400

500

600

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03

30

32

34

36

38

40

Chart 15: Inpatient Admissions and Outpatient Visits in Community Hospitals1980 – 2003

Outpatient Visits

Inpatient Admissions Inp

ati

ent

Adm

issi

ons

(in

mill

ions)

Ou

tpati

ent

Vis

its

(in m

illio

ns)

…and rising demand for hospital services.

17

One in four Americans have multiple chronic conditions…

24%

11%

7%

4%3%

0%

5%

10%

15%

20%

25%

1 2 3 4 5+

Chart 16: Percent of the Population with One or More Chronic Medical Conditions2001

Number of Chronic Medical Conditions

Source: Adapted from Partnership for Solutions, Medicare Expenditure Panel Survey, 2001, Chronic Conditions: Making the Case for Ongoing Care, September 2004

Perc

en

t of

Tota

l Popula

tion

18

…and the number of people affected is projected to increase.

0

20

40

60

80

100

120

140

160

180

1995 2000 2005 2010 2015 2020 2025 203042%

43%

44%

45%

46%

47%

48%

49%

50%

Population Percent of Population

Chart 17: Number and Percent of Americans with Chronic Medical Conditions,*1995 – 2030

Mill

ions

of

Peop

le

Source: Adapted from Partnership for Solutions, Johns Hopkins University, Chronic Conditions: Making the Case for Ongoing Care, December 2002

Perc

en

t of

Tota

l P

opu

lati

on

*Values for 2005 to 2030 are projections.

19

Individuals with chronic conditions account for most health care spending…

Individuals without chronic

medical conditions(17%)

Individuals with chronic medical conditions

(83%)

Chart 18: Health Care Spending on Individuals with andwithout Chronic Medical Conditions

2001


20

…and are more likely to be hospitalized, for longer periods of time,…

0%

5%

10%

15%

20%

25%

30%

35%

0 1 2 3 4 5+0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Chart 19: Percent of the Population with Inpatient Hospital Stays,by Number of Chronic Medical Conditions

2001


Perc

en

t of

Pop

ula

tion

Avera

ge In

pati

ent

Days


Percent of Population Avg. Inpatient Days

21

…at higher costs than the rest of the population.

$222

$666

$1,453

$2,050

$3,169

$4,542

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

0 1 2 3 4 5+0%

10%

20%

30%

40%

50%

60%

70%

80%

Chart 20: Average Annual Inpatient Spending per Person and Percent ofMedicare Expenditures, by Number of Chronic Medical Conditions

2001


Perc

en

t of

Med

icare

Exp

en

dit

ure

s

Annual Per

Pers

on

In

pati

ent

Hosp

ital

Sp

en

din

g


Annual Per Person Inpatient Hospital Spending Medicare Expenditures

22

Source: Centers for Disease Control and Prevention, National Center for Chronic Disease Prevention & Health Promotion, Behavioral Risk Factor Surveillance System, 1990-2002

16%18%

20%21%

24%

27%28%

7%9%

11%12%

13%

16% 17%14%

15%17%

24%22%

20%19%

19%18%

17%15%

14%13%12%

5%

10%

15%

20%

25%

30%

90 91 92 93 94 95 96 97 98 99 00 01 02

50-64

Med

ian P

erc

en

t

35-49

65+

18-34

Chart 21: Median Percent of the Population that is Obese*, by Age Cohort

1990 – 2002

The growing percentage of Americans with obesity has raised concerns…

*All respondents 18 and older who report that their Body Mass Index (BMI) is 30.0 or more.

Age

23

…because obesity is linked to higher levels of chronic disease…

0% 5% 10% 15% 20% 25%

Heart Disease

Upper gastrointestinal

Hyperlipidemia

Arthritis

Other pulmonary conditions

Hypertension

Percent of Population Treated for Condition

Normal Overweight Obese

Chart 22: Treated Disease Prevalence by Obese, Overweight and Normal Weight2002

Source: Thorpe KE, Curtis SF, Howard DH, Joski P, “The Rising Prevalence of Treated Disease: Effect on Private Health Insurance Spending,” Health Affairs – Web Exclusive, June 27, 2005; Analysis based upon authors’ evaluation of National Medical Expenditure Survey (NMES), 1987, Medical Expenditure Panel Survey (MEPS), 2002

24

$0

$500

$1,000

$1,500

$2,000

$2,500

20-24.9 25-29.9 30+

Source: Thompson D, et al., Body Mass Index and Future Healthcare Costs: A Retrospective Cohort Study, Kaiser Permenente NW Division, 1999

Chart 23: Body Mass Index as a Predictor ofHospital Inpatient, Outpatient, and Drug Costs

1998

…more use of health care resources…

Mean A

nnu

al C

ost

s p

er

pers

on

$1,631$1,794

$2,218

Body Mass Index

Drug Costs

Outpatient Costs

Inpatient Costs

* Obese, by definition, is a body mass index (BMI) of greater than or equal to 30. Overweight is a BMI of greater than or equal to 25.

25

…and increased spending on health care.

Chart 24: Additional Private Health Insurance Spending Attributable to Obesity*1987 and 2002

Source: Thorpe KE, Curtis SF, Howard DH, Joski P, “The Rising Prevalence of Treated Disease: Effect on Private Health Insurance Spending,” Health Affairs – Web Exclusive, June 27, 2005; Analysis based upon authors’ evaluation of National Medical Expenditure Survey (NMES), 1987, Medical Expenditure Panel Survey (MEPS), 2002

$0

$8

$16

$24

$32

$40

1987 2002

0%

4%

8%

12%

16%

Private Insurance Spending (in billions) Percent of Private Insurance Spending

Pri

vate

Insu

ran

ce S

pen

din

g(i

n m

illio

ns)

Perc

en

t of

Pri

vate

Insu

ran

ce

Sp

en

din

g

* Calculations based upon additional expenditures (per person) on obese adults with private health insurance, relative to normal-weight adults with private health insurance.

26

Hospitals are treating sicker patients…

-5%

-2%

1%

4%

7%

10%

13%

16%

Severity 1 Severity 2 Severity 3 Severity 4

(Least)

Chart 25: Percent Change in Share of Cases, by Severity of Illness, within Diagnostic Related Groups (DRGs)

1998 – 2000 and 2000 – 2002

Source: The Lewin Group analysis of the National Inpatient Samples for 1998, 2000, and 2002 using APR-DRGs

Perc

en

t C

hang

e in S

hare

of

Case

s by

Severi

ty o

f Illn

ess

(Moderate)

(Major) (Extreme)

1998 - 2000 2000 - 2002

27

…but the more resource intensive diagnoses are not adequately reimbursed.

0

0.5

1

1.5

2

2.5

Respiratoryinfections

Pneumonia withcomplications

andcomorbidities

Medical backproblems

Nutritional andmetabolic

Renal failure

Severity 1 (Least)

Severity 2 (Moderate)

Severity 3 (Major)

Severity 4 (Extreme)

Source: MedPAC analysis of Medicare hospital inpatient claims and cost reports from CMS, fiscal year 2000-2002

Chart 26: National Average Relative Payment-to-Cost Ratios Across and Within Selected All-Patient Refined Diagnostic Related Groups (APR-DRGs)

FY 2000 – 2002

Rela

tive P

aym

ent-

to-C

ost

Rati

o

Note: Levels represent APR-DRG severity levels for selected APR-DRGs. Severity level 1 is least severely ill.

28

4.1%

5.5%

6.4%6.1%

9.3%

8.2%

7.2%

5.8%

0%

2%

4%

6%

8%

10%

1999 2000 2001 2002

Avera

ge A

nnual G

row

th R

ate

Chart 27: Average Annual Growth Rate of Hospital Capital vs. Total Growth Rate Across All Hospital Departments

1999 – 2002

Growth in capital spending has lagged relative to overall hospital cost growth…

Source: The Lewin Group analysis of hospital cost report data - Consistent panel of hospitals reporting each year (N=4644 short-stay hospitals)

Total Growth Rate

Hospital Capital

29

7.9 8.2 8.4 8.6 8.8 8.9 9.2 9.3 9.2 9.4 9.6 9.8 9.8

8.0

0

2

4

6

8

10

12

90 91 92 93 94 95 96 97 98 99 00 01 02 03

Years

Chart 28: Median Average Age of Plant*1990 – 2003

Source: The 1994 Almanac of Hospital and Financial Operating Indicators, The 1996-7 Almanac of Hospital and Financial Operating Indicators, and The 2005 Almanac of Hospital Financial and Operating Indicators

* Average age of plant: The financial age of the fixed assets of the hospital, calculated by dividing accumulated depreciation by the current year depreciation expense.

…as reflected by the nation’s aging hospitals…

30

Chart 29: National Health Expenditures on Construction1996 – 2014*

… but expenditures on health care construction are projected to increase significantly over the next decade.

$0

$7

$14

$21

$28

$35

$42

$49

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

In B

illio

ns

* Calendar years 2004-2014 are projected data. The health spending projections were based on the 2003 version of the NHE released in January 2005.

Source: Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Accounts data

31

Ohio State University Health System Hospitals

Technology

Computerized Physician Order Entry & Electronic Medication Administration Record

170 Hospitals in U.S. Veterans Health Administration

Electronic Health Record System

Valley Hospital in Ridgewood, NJ

Medication Bar Coding System

• Average medication turn-around time decreased by 64%

• Average laboratory order time decreased by 25%

• Medication errors decreased by an estimated 70%, on average.

• Medication errors decreased to nearly 0%, with

• Lowered costs and

• Increased efficiency

Source: Mekhjian HS, Kumar RR, Kuehn L, et al., “Immediate Benefits Realized Following Implementation of Physician Order Entry at an Academic Medical Center,” Journal of the American Informatics Association, Sept-Oct 2002; Rhonda L. Rundle, WSJ, December 10, 2001; Campbell, Newark Star-Ledger, April 14, 2004

Chart 30: Examples of Information Technology Adopted by Hospitals and Health Systems

1998, 2000, and 2004

Hospitals are implementing numerous innovations in information technology…

Impact Hospital

32

Chart 31: Spending on US Health Care Information and Communications Technology,* 2004 and 2008

….and their spending in this area is projected to increase.

Source: Datamonitor Market Research Report, US Healthcare ICT Spending Opportunities, August 2004

$0

$7

$14

$21

$28

$35

2004 2008

$26.0

In B

illio

ns

$34.1

Hospital Spending

$11.7

Hospital Spending

$15.0

* Forecasted data using a Compound Annual Growth Rate (CAGR) of 7 percent

Other Provider

and Payer Spending

$14.3

Other Provider

and Payer Spending

$19.1

33

25%

29%

32%

32%

35%

38%

44%

53%

0% 15% 30% 45% 60%

Percent of Survey Participants Citing Taskas a Top IT Priority

Chart 32: Current IT Priorities, Within Next 12 Months (2005)

Source: Adapted from Healthcare Information and Management Systems Society, 16th Annual HIMSS Leadership Survey sponsored by Superior Consultant Company, February 14, 2005

Patient safety and compliance are top IT priorities for hospitals, over the next 12 months…

Reduce Medical Errors

Promote Patient Safety

Upgrade Security/HIPAA Compliant

Replace/Upgrade Inpatient

Clinical SystemsImplement WirelessSystems

Connecting IT at Hospital & Remote

LocationsProcess/Workflow

RedesignImplement an

Electronic Health RecordTrain Personnel to

Use System

34

42%

42%

44%

50%

52%

55%

62%

0% 10% 20% 30% 40% 50% 60% 70%

Percent of Survey Participants Citing Technology as a Most Important

Application

Chart 33: Most Important Applications, Over Next Two Years (2005)

Source: Adapted from Healthcare Information and Management Systems Society, 16th Annual HIMSS Leadership Survey sponsored by Superior Consultant Company, February 14, 2005

…and hospitals plan to invest heavily in electronic health records and bar coding applications over the next 2 years.

Electronic Health Record

Bar Coded Medication Management

Clinical Information System

Computerized Physician Order Entry

(CPOE)Enterprise-wide

Clinical Information Sharing

Clinical Data Repository

Digital Picture Archiving (PACS)

35

Technology Medicare Costs

Drug-eluting coronary stents $2 – 4 B

ICD for sudden death prophylaxis $1 – 3 B

PET for Alzheimer’s disease $1 B

Verteporfin for macular degeneration

$750 M

Left-ventricular assist devices $1 – 7 B

Source: Adapted from Neumann PJ, Medicare National Coverage Decisions: How is CMS Doing? Presented at National Health Policy Conference, February 2005

Chart 34: Projected Annual Costs of Recent Technology RelatedMedicare Coverage Expansions

A single new technology can add billions to the cost of caring.

36

Despite its cost, physicians rank imaging as the top medical innovation of the last three decades…

32%

40%

41%

41%

41%

47%

48%

55%

55%

75%

Hip and Knee Replacement

Cataract Extraction and Lens Implant

SSRIs and Other Recent Antidepressants

PPIs and H2 Blockers

CABG

Mammography

Statins

Balloon Angioplasty

ACE Inhibitors

MRI and CT

*Respondents were instructed to choose 5 to 7 medical innovations (from a list of 30) whose loss would have the most adverse effects;

PPI = Proton Pump Inhibitor

Source: Adapted from Blue Cross and Blue Shield Association, Medical Cost Reference Guide, October 2004

Chart 35: Percentage of Internists Stating Loss of the Innovation Would Most* Adversely Affect Their Patients

37

…which is reflected in the expected volume growth of more advanced imaging technology.

Source: Adapted from Blue Cross and Blue Shield Association, Medical Cost Reference Guide, October 2004

Chart 36: Actual and Projected Hospital-Based Inpatient, Outpatient and Freestanding Facility Imaging Volume in the U.S.*

2002 and 2008

0

30

60

90

120

150

X-Ray CT MRI Ultrasound Other

2002

2008

-9%Percent Growth2002 – 2008 122% 133% 57% 10%

Pro

ject

ed Im

agin

g V

olu

me in

U.S

.(i

n m

illio

ns)

Estimated Cost per Procedure**

$32.12 $703.90$292.68 $103.39

*Estimates do not include imaging services provided within physician offices ** Cost estimates are calculated from the top 5 CPT codes for each technology, weighed by volume

38

Condition YearChange in Treatment

Costs

Outcome

Change ValueNet

Benefit

Heart Attack1984-98

$10,000 One year increase in life expectancy

$70,000 $60,000

Low-Birthweight Infants

1950-90 $40,000Twelve year increase in

life expectancy$240,000 $200,000

Depression 1991-96$0

< $0*

Higher remission probability at some cost forthose already treated

Most people treated, with benefits exceeding costs

Cataracts 1969-98$0

< $0*

Substantial improvements in quality at no cost increase for those already treated

Most people treated, with benefits exceeding costs

Breast Cancer 1985-96 $20,000Four month increase in

life expectancy$20,000 $0

Source: Adapted from Cutler DM, McClellan M, “Is Technological Change in Medicine Worth It?” Health Affairs, 20(5):11-29, 2001

Chart 37: The Value of Changes in Medical Technology

Overall, medical technology has significant economic and societal benefits.

*No significant change in treatment cost or minimal cost savings.

The Costs of Caring: Sources of Growth in Spending for Hospital Care July 2005.

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Transcript of The Costs of Caring: Sources of Growth in Spending for Hospital Care July 2005.