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An Overview of Health Care Spending Patterns in the United States: Using National Data Sources to Explore Trends in Nursing Services

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Julie Sochalski, PhD, RN
Patricia A. Patrician, MSN, RN

Abstract

National health care spending trends have been tracked through the federal governmental for much of the latter half of the 20th century. A review of these spending trends illustrates not only health care's contribution to the overall national economy, but more importantly it allows us to assess our priorities for spending that money. Nursing has long sought information about the "cost" of its care, at the micro-level, and has desired to articulate its share of national expenditures, at the macro-level. This quest has been fueled largely by the profession's desire to more accountably argue the value of its services. This article reviews national health expenditure trends, and explores how the analysis of these trends can be used to shape nursing's own research agenda for assessing the value of its services.

Citation: Sochalski, J., Patrician, P., (June 10, 1998). "An Overview of Health Care Spending Patterns in the United States: Using National Data Sources to Explore Trends in Nursing Services" Online Journal of Issues in Nursing. Vol. 3, No. 1, Manuscript 1. Available: www.nursingworld.org/MainMenuCategories/ANAMarketplace/ANAPeriodicals/OJIN/TableofContents/Vol31998/No1June1998/SpendingPatternsintheUS.aspx

Introduction

Throughout most of the latter half of the 20th century, spending for health care in the United States has outpaced spending for the economy as a whole. Between 1980 and 1995, the economic output of the health sector grew nearly twice as fast as that for the total national economy (Levit, et.al., 1996). The evidence of this spending abounds: the unceasing development and widespread dissemination of path-breaking technologic advances, record levels of employment in health services, and continual investment in new facilities and services, as examples (Reinhardt, 1996; Newhouse, 1993). Both the private and public sectors have watched their total receipts for health services rise steadily since the 1970s (ProPAC, 1996). Yet the pattern of spending has shifted over time, in response to both changes in governmental health policies and initiatives from the private sector aimed at constraining the rate of growth in spending. The shift can be seen in who is paying for care and what we as a nation are buying. A review of these trends is particularly instructive for nursing, as it seeks to understand its contribution to the health care economy and to examine the value of its services.

Background

For the past 60 years, sources of funding for health care have steadily grown in both the public and private sectors (Starr, 1992; Starr, 1982). In the private sector, the spread of employer-based health insurance fueled the health care system's coffers, increasing the ranks of those with access to health care coverage and gradually expanding services that were covered under these policies (U.S. Congressional Budget Office, 1993). In the public sector, government-sponsored health insurance addressed the needs of those who fell through the cracks -- the elderly, the poor, and the disabled -- through the Medicare and Medicaid programs. Now there was public money to pay for the millions who could not participate in employer-sponsored health insurance systems, either because they were elderly or indigent.

This infusion of revenue into the health care system coincided with the rise of the American hospital system (Rosenberg, 1987). In a steady rise since the turn of the century hospital beds were built and filled with patients receiving ever more advanced medical care, supported directly through federal dollars for hospital construction and aided by the shift in the training site for physicians to the hospital setting (Starr, 1982). Voluntary hospitals got their largest boost in capacity this century with the passage of the Hill-Burton Act in 1946, one of Truman's post-war health proposals to put this nation on the course to better health. This funding, which was largely controlled by the hospital industry, was targeted at increasing the nation's hospital beds by over a quarter million (Stevens, 1989). Postwar economics were such that the goal of almost every state-supported medical school was to have a new or reconstructed university hospital dedicated to teaching and research, supported by state appropriations, with unreimbursed patient care also covered by the state budget (Ginzberg, 1989).

Concomitantly physician supply grew, professionalized, and specialized, following upon the Flexner Report early in this century that staked out standards for medical education, and aided by biomedical research funding. This funding came predominantly from National Institutes of Health, which began to grow rapidly after World War II (Starr, 1982). Encouraged to believe that more money would lead to earlier cures of such dread afflictions as cancer, heart disease, and stroke, Congress' annual appropriations increased by about 18% per year (in inflation-free dollars) between 1950 and 1965. This funding enabled medical schools to expand the size and expertise of their faculty and influenced the further development of technology, the demand for specialist training, and the consequent specialization of medical care in the United States.

The net effect of these actions has been to create the supply of and demand for acute care, physician-specialty services, which is apparent when reviewing trends in spending for health care over the past several decades. One category of spending not explicitly noted in such reports on expenditures is that for nursing services.


Nursing's services, particularly those rendered in institutions like hospitals where their services do not generate independent reimbursement, cannot be readily extracted from these data systems.

The reason for that is most large-scale data systems that have been used to document the use and cost of health services are founded on health care claims records submitted for reimbursement, or institutional cost reports that are submitted to payers or the government to reconcile expenditures (McPhillips, 1992). Nursing's services, particularly those rendered in institutions like hospitals where their services do not generate independent reimbursement, cannot be readily extracted from these data systems. But a review of health care spending and nursing service trends in this country provides strategic information for structuring studies to examine the use and value of nursing services.

National Health Expenditures Trends

Overall Health Expenditure Trends

Over the 25-year period of 1970 and 1995, health expenditures climbed from $73.2 billion to $988.5 billion, and from $341 to $3,621 per person on a per capita basis (Levit, et. al., 1996). During this period, the share of the economy devoted to health nearly doubled, from 7.1 % to 13.6% of Gross Domestic Product (GDP), such that now almost one out of every seven dollars comprising our national economy is marked for the health care industry. Yet after relatively consistent growth for over two decades, the result of both rising health expenditures and concomitant periods of slowdown in the general economy, the proportion of GDP devoted to health care stabilized between 1993 and 1995, at 13.5% and 13.6%. This stabilization is due to an ebbing in the growth of health expenditures and not just an artifact caused by the enhanced performance of the general economy. Indeed, the period of 1993 to 1995 recorded the lowest rate of growth in health spending in over three decades, between 5 and 7% each year over this period.

Broadly speaking, health spending increases have been the result of changes in the price for and volume of health care services used. The factors responsible for the growth in expenditures include:

  • inflation in the general economy, which raises the price of goods and services over time
  • inflation specific to the health care industry, referred to as "medical price inflation," which has generally been higher than inflation in the general economy;
  • growth in the nation's population, creating more users of health care services; and
  • changes in the utilization patterns and the intensity of services provided, fueled by the growth in health care technology and the practice patterns of providers (U.S. Congressional Budget Office, 1993; 1992).

Among these factors, medical price inflation and the intensifying of services have been the principal drivers of rising health costs.

The health sector has provided a substantial share of the job growth in the country. In 1996 nearly 10 million people, or roughly one out of every 13 people employed in the United States, were working in health services (Statistical Abstract of the United States 1997, 1997). Employment in health care has grown at three times the rate for overall employment during the past 15 years, at 81% and 27%, respectively. Furthermore, health care is a dominant employer in many of the nation's large cities and urban areas (Pennsylvania Economy League, Inc., 1996). The Bureau of Labor Statistics (1996) predicts that one-fifth of all jobs created during the 1994-2005 period will be in health care, and health care holds three of the top 10 occupations leading the way in job growth.

Sources of Revenues

In 1995, just over half of all health spending -- 53.8% -- came from the private sector, primarily through private insurance or out-of-pocket expenditures. The public sector, i.e., federal, state, and local sources, contributed the remaining 46.2% of all monies coming into the system (Levit, et. al., 1996). Between 1970 and 1995, the proportion of all spending coming from the private sector has gradually declined, from 62.2% in 1970 to 53.8% in 1995, while the public sector has seen its contribution grow from 37.8% to 46.2%.

The increasing public sector share of expenditures is due in part to expansions in the eligibility and consequently spending in the Medicaid program since the mid-1980s, the aging of the population which has increased the Medicare rolls, and expansions in the benefits under both the Medicare and Medicaid programs (Bodenheimer & Grumbach, 1995). The decline in the share of expenditures coming from the private sector, notably steeper since the early 1990s, appears to be due to savings incurred through the adoption of managed care. Increased enrollment in managed care plans, which accelerated in the 1990s in the private sector, appears to be having a salutary effect on efforts to slow the rate of growth in health care costs (Wholey, Christianson, Engberg & Bryce, 1997; Robinson, 1996). Levit and colleagues (1996) noted that between 1969 and 1993, Medicare experienced an annual rate of growth in costs per enrollee that was lower than that in the private sector, at 10.9% and 12.5%, respectively. Since 1993, that trend has reversed, with Medicare's annual costs falling to 9.7% and private sector costs plummeting to an annual rate of 3.5%.

Not only has there been a shift in the spending shares between the public and private sectors, but within each of those sectors there have been some noteworthy changes. An examination of personal health care expenditures 1 by payer source since 1970 shows that within the private sector, a larger share of spending has been borne by private health insurance sources, and a declining share from out-of-pocket sources. Between 1970 and 1995, private health insurance's share of spending for personal health care services grew from 23.2 to 31.5%, while out-of-pocket expenditures nearly halved, from 39 to 20.8% (Levit, et. al., 1996).


Consumers are paying more out-of-pocket for health care services in absolute dollars. But the expansion of health benefit packages and the rising costs of covered services have caused the share of spending borne by employers, the primary source of private health insurance, to grow sharply when compared to out-of-pocket spending.

This trend persisted over the entire period despite rising co-pays and deductibles, larger shares of health insurance premium being paid by individuals, and the considerable out-of-pocket spending by the elderly for prescription drugs that are not covered by the Medicare program. Consumers are paying more out-of-pocket for health care services in absolute dollars. But the expansion of health benefit packages and the rising costs of covered services have caused the share of spending borne by employers, the primary source of private health insurance, to grow sharply when compared to out-of-pocket spending.

Turning to public sector, between 1970 and 1995 Medicare's share of personal health care spending nearly doubled, from 11.4% to 20.9% (Levit, et. al., 1996). Similarly, Medicaid's share also grew from 8.0% to 15.1%, while other government sources of spending declined in like fashion. Some of the decline in out-of-pocket spending is likely the result of shifts in the population from private sector health programs to the public sector, through either Medicare or Medicaid.

In 1995 there were 33 million people aged 65 years or older who were covered by the Medicare program (Health Care Financing Administration, 1996). Of the 231.9 million people in the United States under the age of 65 in that year, 29 million individuals were covered by Medicaid and 40.3 million, or 17.4%, had no health insurance (EBRI, 1996). Those with private insurance were predominantly covered by employer-sponsored health insurance -- just over 70% of this group. (EBRI, 1996). The size of the uninsured population has been steadily growing since the late 1980s. The economic boom this country is enjoying and the record low rate of unemployment have done nothing to lower the ranks of the uninsured. One reason is that the job growth has been largely in the service industries, occupations that have traditionally been among those occupations with lower rates of employer-sponsored health insurance.

Sources of Spending

About 80% of personal health care spending is accounted for by four items:

  • hospital care
  • physician services
  • long term care (i.e., nursing home and home health care)
  • prescription drugs and other non-durable medical supplies.

Hospitals are by far the most intensive settings in which health care is delivered, and consequently hospital care is the largest source of spending for personal health care (OTA, 1995). Since the 1980s, a number of governmental policy changes and private sector initiatives have been undertaken to constrain the growth in hospital spending (Altman & Ostby, 1991). The most notable among these was Medicare's Prospective Payment System. Consequently, between 1980 and 1995, hospital expenditures declined as a proportion of personal health care spending, falling from 47.3% to 39.8% (Levit, et. al, 1996). Thus while hospital care still consumes the largest single share of spending, its contribution to total health spending has declined (Sochalski, Aiken, and Fagin, 1997). In fact, between 1993 and 1995 hospital care had among the lowest growth rates in spending of all health services.

Hospitals exhibited a shift in the pattern of spending as well. Inpatient spending grew much more slowly during the 1990s compared with outpatient expenditure growth (Wholey, Christianson, Engberg & Bryce, 1997; Robinson, 1996; Levit, et.al., 1996). Between 1990 and 1995, the share of hospital spending from the inpatient setting declined from 66% to 61.9%, while the outpatient share grew from 20.4% to 27%. This change in the spending pattern is in keeping with other trends noted in the use of hospitals -- the decline in admissions and the average length of stay, lower occupancy rates, and a large increase in the proportion of surgical procedures being performed in outpatient/ambulatory settings (AHA, 1996; Heffler, 1996; ProPAC, 1996).

Between 1980 and 1990, spending for physician services grew more quickly than total personal health care services, and consequently consumed a growing share of total spending. This trend reversed itself between 1990 and 1995, as a decelerated growth in spending on physician services caused its share of spending to decline slightly. Between 1993 and 1995, spending for physician services grew more slowly than total personal health care expenditures (Levit, et.al., 1996). Changes in payment policy for physicians, implemented in the 1990s under the Medicare program, and the increasing participation of physicians in managed care plans, are felt to be the principal reasons that physician spending has slowed (Emmons & Simon, 1996). In 1990 61% of physicians had at least one managed care contract, with that number leaping to 83% by 1995 (Levit, et.al., 1996).

Prescription drug costs, which had been growing more quickly than total health care spending at the start of the decade, saw much lower rates of increase in 1993 and 1994, only to see that trend sharply reversed in 1995 (Levit, et.al., 1996). The reason for this dramatic rise seems to be linked with the increase in the use of prescriptions, more than with rising prices for pharmaceuticals (IMS America, 1996; Schondelmeyer & Seoane-Vazquez, 1996). As more people sign up with managed care plans, which historically have included prescription drugs in their benefit packages, the demand for prescription drugs appears to be rising.

Growth in the costs of long term care continues to outstrip the growth rates in total health care spending. Long term care expenditures grew 50% faster than spending for personal health care overall between 1990 and 1995, so that its share of expenditures grew from 10.4% to 12.1% (Levit, et.al., 1996). Spending for these services is increasingly borne by public sources, particularly the Medicare program. The growth in long term care costs has been due in part to the development and use of subacute care units, by both nursing homes and home health agencies, which require a higher staffing skill level and more expensive high-technology equipment.

Health Spending Trends and Nursing Services

What do these trends in national health care expenditures tell nurses? The shifts in national health spending patterns have been the harbinger of changes noted in nursing service trends. Overall, job growth for registered nurses has continued along a steady pace since 1988. But the settings laying claim to these new jobs reflect both the diminishing role played by hospitals and the emergence of other settings as sources of health spending. Between 1988 and 1996 the hospitals' share of RN employment declined from 68% to 60%, while both the nursing home, home health, and ambulatory care sectors saw a steady rise in job opportunities (Moses, 1997; 1990).

As enrollment in managed care plans grows in the coming years, the pressure on health costs that these plans have exerted in the past, especially reductions in hospital use, will likely continue. The subsequent impact on nursing services will be two-fold: 1) the roles, responsibilities, and settings that nurses will occupy will continue to unfold, and 2) the organizational structures of settings in which nurses find themselves working will likewise evolve in ways that could significantly affect the outcomes of care delivered.


The increasing numbers of RNs in nursing homes, in part the result of policy changes in national nursing home regulations, have the potential to significantly improve the process and outcomes of care in the nation's long term care facilities.

For example, the increasing numbers of RNs in nursing homes, in part the result of policy changes in national nursing home regulations, have the potential to significantly improve the process and outcomes of care in the nation's long term care facilities. In contrast, the decline of RNs at the bedsides of patients in hospitals will present a challenge to nursing to maintain the quality of care with teams of caregivers that have changed both in size and skills.

These new service patterns represent a very important target of opportunity for nursing to revisit its efforts to assess the value of its services (Aiken, Sochalski, and Lake, 1997). Nursing has made great strides towards articulating its position within the nation's health care economy through the development of tools and approaches to capture the cost of its care. These concerted efforts have provided the foundation for an aggressive outcomes research agenda, one that addresses the critical issue of "value" of nursing services (McCormick, 1992; Meister, 1992; Hegyvary, 1992). Vigorous pursuit of that agenda will provide nursing with the information needed to more accountably and effectively argue the value, for the cost, of its services. Such an agenda might include the following activities: assessing the outcomes of patients cared for in hospitals that have radically restructured their nurse staffing arrangements; exploring the impact of improved RN staffing on both the short and long term outcomes of nursing home residents; and determining the effect of the expanded use of nurses in alternative ambulatory settings on the health care utilization patterns of these patients. By taking such steps nursing will position itself to not only argue its "value" but, more importantly, to effectively advocate for a delivery system that meets both the quality and cost goals of the public.

Authors

Julie Sochalski, Ph.D., R.N

Julie Sochalski, Ph.D., R.N is an assistant professor for Health Services Research and Nursing, Associate Director for the Center for Health Services and Policy Research, and Senior Fellow at the Leonard Davis Institute for Health Economics at the University of Pennsylvania. She has held senior policy analyst positions in the federal government and in New York, and was a Robert Wood Johnson Health Policy Fellow during 1992-93. Dr. Sochalski has extensive experience in health care financing and health policy in both the public and private sectors. Currently she is principal investigator on an NIH-funded study examining the cost and quality outcomes of a nurse- managed geriatric day hospital, and is co-principal investigator on two NIH-funded studies assessing the impact of hospital nurse staffing on patient outcomes in the U.S., Canada, England, Scotland and Germany.

Patricia A. Patrician, M.S.N., R.N

Patricia A. Patrician, M.S.N., R.N is currently a doctoral student at the University of Pennsylvania School of Nursing.

She has extensive clinical and management experience in critical care and cardiothoracic nursing as a nurse manager and clinical nurse specialist, and she has engaged in a range of studies documenting the cost and value of nursing services for coronary artery bypass patients. Most recently, she was the Educational Program Manager for the Army Nurse Corp responsible for the design and evaluation of their staff educational programs conducted throughout the services of the Corp. Her current research activities are focused on patient and nurse outcomes in institutions undergoing work force re-engineering.

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1 Personal health care expenditures comprise 88% of all spending, and excludes spending for research and training, facility construction, administrative costs, and government public health activities.


© 1998 Online Journal of Issues in Nursing
Article published June 10, 1998.


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