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Health Care Costs: Why Do They Increase? What Can We Do?

A Workshop Brief for State and Local Policymakers

This workshop provided participating State and local officials in the legislative and executive branches of government with a forum for discussing issues and strategies for containing health care costs. The workshop was sponsored by Agency for Healthcare Research and Quality's (AHRQ's) User Liaison Program (ULP) and was held in Los Angeles, California, May 21-23, 2001.

About the Workshop Sponsor.



At the completion of this workshop, participants were expected to be better able to:

  • Understand factors driving health care costs, including variations across States/regions.
  • Identify policy A levers available to States in their efforts to confront rising health care costs.
  • Explain why drug spending is rising so quickly and discuss factors to consider in making pharmacy coverage decisions.
  • Describe innovations in high-cost case management and disease management for chronic conditions.
  • Describe the processes and methodologies used in technology assessment and resources available from AHRQ, other Federal agencies and the private sector.
  • Identify the impact of medical errors on health care costs and opportunities for improving patient safety.
  • Identify methods for monitoring health care expenditures.

Session Summaries

Factors Driving Cost Increases

Health insurance premiums and underlying medical expenses have risen significantly since 1998. Factors accounting for rising costs include growth in pharmaceutical expenses, expensive new technologies, aging of the population, and increased consumer demand. Both private and public sectors are affected by the dramatic increases. The major themes affecting cost trends include the underwriting cycle, retreat from tightly controlled managed care, and technological change.

State Policy Options

As American health policy vacillates between regulatory and market strategies, State leaders will be forced to employ whatever tools are available to limit rising costs so other priority needs can be addressed. There have been three major eras of health care reform characterized by various major cost containment strategies. Several strategies are emerging that can improve health care purchasing and control rising costs.

Managing High Cost Cases

An ongoing challenge facing providers, payers, and policymakers is that a relatively small number of individuals who require extraordinary medical care consume a disproportionately large amount of health care resources. High-cost populations may include persons with high-risk pregnancy, cancer, heart disease, and HIV/AIDS, as well as disabled populations. Coordinated care, or case management, could potentially have a positive impact on costs and productivity.

Addressing Pharmaceutical Expenditures

Pharmaceuticals comprise the fastest growing portion of health care budgets in the private sector and government. The main cost drivers include changing product mix and increasing use. Underlying factors include research, development, and promotion costs, including direct-to-consumer advertising. Also, by requiring limited cost sharing for prescription drug benefits, insurers are shielding consumers, creating an incentive for increased demand. States are considering options for lowering Medicaid prescription drug costs to ease strained Medicaid budgets.

Disease Management

Disease management focuses on providing a continuum of care for those with chronic conditions, such as diabetes and asthma. Leading disease management initiatives in Texas and Florida are showing that disease management is emerging as a promising tool for improving the use of health care resources and perhaps even reducing overall expenditures for certain kinds of cases.

Improving Patient Safety

A 1999 Institute of Medicine (IOM) report, To Err is Human, estimated that between 44,000 and 98,000 people die each year from medical errors in hospitals alone, making medical errors the eighth leading cause of death in the United States. While not all medical errors are preventable, the IOM estimated that preventable errors cost the Nation about $17 billion annually in direct and indirect costs. Improving patient safety through reducing preventable medical errors often requires systems-level changes.

Monitoring Costs

Monitoring changes in health expenditures, insurance premiums, and other cost indicators is fundamental to sound policymaking. States need this information to assess the potential impact of new proposals and evaluate current programs. Minnesota and Maine are examples of how States have used different approaches for collecting and using cost data and related information. AHRQ's Medical Expenditure Panel Survey (MEPS) provides information that States can use to assess expenditures, especially related to employer-sponsored health insurance.

Assessing New Technologies

Some new health care technologies may reduce per unit health care costs; others have the potential to increase costs significantly. Demand for new technologies brings trade-offs in cost, quality, and outcomes. Health technology assessment and other analyses (e.g., cost studies) can help evaluate the potential impact and make expenditure decisions. Numerous resources are available, including several Federal agencies, to help assess health care technology and determine health benefits.

AHRQ's User Liaison Program (ULP) disseminates health services research findings in easily understandable and usable formats through interactive workshops. Workshops and other support are planned to meet the needs of Federal, State, and local policymakers, and other health services research users, such as purchasers, administrators, and health plans.

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