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Patrick Springer, Published July 21 2013

Health care costs fall to historic low in past two years

FARGO – A lingering drop in the rate of health care inflation has providers and insurers wondering if the trend is temporary or if it reflects the start of an era of more subdued cost rises.

Blue Cross Blue Shield of North Dakota, for example, has seen a significant drop in the rate of increasing claims, which had been rising an average of 8 percent for a decade.

The rate has hovered around 4 percent over the past two years – falling to “historic lows” – but began edging up during the first three months of this year, said Brad Bartle, the North Dakota Blues’ vice president of actuarial and membership services.

“In 2013, we’re seeing a bit of a trend increase, I would say slowly,” he said. “We’re still trending well below” the 8 percent growth that once was the norm.

“Those are the lowest trends I’ve seen in my career in health insurance,” Bartle added, noting that comparably low increases date back to the 1970s.

Health care inflation, which typically outpaces the general inflation rate by a wide margin, also has been running at a lower level nationally.

Figures from the Bureau of Labor Statistics – tracking only consumers’ out-of-pocket health care expenses – dipped by 0.1 percent in May, registering the first decline since the 1970s.

Compared with a year earlier, the medical prices index increased 2.2 percent. That was above the 1.4 percent general inflation rate, but the lowest increase in four decades.

Patient volume growth

Executives of both Sanford Health and Essentia Health said they believe the more moderate rate of medical inflation reflects the beginning of a permanent trend of more restrained cost increases.

“We’re responding like it’s the new normal,” said Cindy Morrison, Sanford’s executive vice president for marketing.

That new normal is a world in which public and private insurers are shifting to payment formulas that reward better results.

Payers are holding health providers accountable for managing groups of patients in a way that meets quality benchmarks in a cost-effective manner.

At Sanford, growth in patient volumes is due mostly to adding new physicians and services, especially in the Fargo area, said Nate White, Sanford’s chief operating officer.

“That’s what’s driving the utilization increase,” he said, adding that patient volumes lag projections by 1 percent, but are 1 percent above the same period a year ago.

At Essentia, growth in patient volumes has outpaced the increase in costs by 3 percent, said Doug Vang, executive vice president for North Dakota market operations.

“We’re investing a lot to try to keep patients healthy,” he said. Health systems are more aggressively managing patients with chronic diseases, and collaborating with insurers by sharing information to improve care.

Hospitals and clinics cannot grow by increasing prices, Vang said, because of the move toward pay-for-performance and the need to meet quality measures.

“If that was ever the case, it’s not the case anymore,” he said.

Restraining costs

Minnesota and North Dakota, and the Upper Midwest in general, long have been recognized for delivering medical services well below the national average, often with better quality of care.

Those efforts have increased with mounting pressures to restrain costs, including the federal Affordable Care Act.

Executives at both Sanford and Essentia say they have been striving to reduce their costs in a way that avoids layoffs, although Sanford recently trimmed about 50 management positions – through early retirement or buyouts – to save $10 million.

Efficiency steps range from standardized purchasing to fluctuating staffing levels to meet patient volumes, Sanford’s White said.

Also, there is a continuing trend to deliver more care in the clinic than the hospital, and patient stays in the hospital continue to get shorter, so patients can benefit both from restrained costs and better outcomes, Sanford’s Morrison and Essentia’s Vang say.

Although patient utilization has been down, the intensity and complexity of care have increased, the Blues’ Bartle said.

“It’s both doctors ordering and patients wanting more sophisticated health care,” he said. “Health care quality is increasing, but it does have a cost.”

Challenges remain

By some measures, the flatter growth of health care inflation dates back to the mid-2000s. The trend accelerated during the severe recession of 2008-09, and continued during the sluggish rebound.

Annual health care spending from 1980 to 2009 increased an average of 8.1 percent in the United States, 8 percent in Minnesota, 7.7 percent in North Dakota and 8.4 percent in South Dakota, according to figures compiled by the Kaiser Family Foundation.

But health providers and insurers face daunting challenges, including the wave of aging baby boomers, who will require more health care as they enter old age.

Although both Sanford and Essentia are managing under the assumption that growth in utilization will continue, the answer isn’t yet clear whether the trend will be long-lasting. Experts are divided.

“There’s great debate over who’s right and who’s wrong and what’s causing it,” Sanford’s White said. “The jury’s still out, and it’s too early to tell who’s right.”

Readers can reach Forum reporter Patrick Springer at (701) 241-5522