By Amy Goldstein
Washington Post Staff Writer
Tuesday, September 15, 1998; Page A1

A respite from rising medical bills that consumers have enjoyed for several years is coming to an end, according to a new federal study that concludes that the country's spending on health care is likely to double over the next decade to $2.1 trillion.

Costs started accelerating this year, the study says, primarily because the nation already has attained most of the savings that can be derived from an enormous transformation in the health care system that led most Americans into health-maintenance organizations or other kinds of managed care plans.

In addition, the analysis finds that health expenditures are being nudged upward by patients' increasing consumption of expensive prescription drugs, their enthusiasm for new medical technology and their demand for greater freedom to select doctors and visit medical specialists when they want.

"It's the first major report that shows clearly that those who felt managed care would solve the health care cost problem forever were living in a fantasy world," said Drew Altman, president of the Henry J. Kaiser Family Foundation, which sponsors health care research.

The forecast, prepared by economists in the U.S. Department of Health and Human Services and published yesterday in the journal Health Affairs, suggests that medical inflation is unlikely to be as rampant as it was during the late 1980s and early '90s. Nevertheless, the amount of money the country spends on health care will increase sharply in the coming decade, from 14 cents of every dollar to 17 cents by 2007.

On a national scale, the resumption of greater spending means that health care, already a dominant yet treacherous political issue, is likely to remain a major force in elections and budget decisions. On a personal level, higher costs will translate inevitably into higher insurance premiums for employers and families.

Already, there is evidence that insurance prices, relatively stable for the last few years, are starting to climb. Just last week, the Office of Personnel Management announced that premiums for the federal health insurance program for workers and retirees will increase an average of 10.2 percent next year, the biggest jump since 1989. Similarly, California's Medicaid program, one of the largest purchasers of insurance in the country, recently abandoned its policy of refusing to pay higher prices and agreed to grant one of its main HMOs, Kaiser Permanente, a 10 percent increase in premiums next year.

"That's a signal that the same thing will happen with other plans" around the country, said Paul Fronstin, a researcher at the Employee Benefits Research Institute.

The study predicts that premiums on private insurance will be climbing at 8.2 percent annually by 2007, compared with 3.6 percent in 1996. Rick Foster, chief actuary for HHS's Health Care Financing Administration – which prepared the analysis – said in an interview that it is difficult to predict the degree to which those higher premiums will be borne by companies or whether "employers will say 'pony up'‚" to their workers.

In the current environment of low unemployment, the study notes, companies are more likely to absorb the extra costs because they must offer better benefits to attract scarce workers. But that will change, it says, if the economy deteriorates.

The study also shows that, in another turnaround from recent trends, the government appears to be doing a better job at holding down costs than private health insurers. In particular, Medicare, the vast public insurance program for the elderly, will be reined in by a variety of changes wrought by last year's federal budget agreement. As a result, hospital payments will rise more slowly and home health services and nursing homes will be paid by a new, less lucrative method.

Among people with private insurance, the study suggests, managed care already has exerted most

of its potential to save money. Starting early this decade, HMOs and similar arrangements became the darling of employers, who were drawn to the health plans' restrictions on care and the money they saved.

But today, with 85 percent of privately insured Americans in some form of managed care, the nation already has gotten what the study calls the "one-time savings" from the switch to less expensive medical arrangements.

To some extent, the new round of cost increases reflect the way managed care companies do business. Starting this year and continuing for the next decade, the study says, the biggest cost increases will be for prescription drugs, with spending on them rising by nearly 10 percent each year. They are rising, in part, because patients in HMOs usually do not have to pay – or pay much – for prescriptions and because health plans are tending to place certain patients on drug therapies instead of sending them to a doctor or hospital.

But drug costs are also climbing, the study says, because people are eager for new drugs coming on the market, many of which are expensive and being advertised directly to consumers.

On the other hand, some cost increases reflect patients' frustrations with managed care. Spending on doctors, which increased by about 3 percent a year from 1993 to 1996, is expected to increase by nearly 8 percent annually from 2001 to 2007 – in part because patients are gravitating toward more expensive health plans that have looser rules.

The rising costs mean that HMOs "will remain caught between two masters," Altman said. "They are no longer going to be able to satisfy patients, who want more flexible arrangements, and employers and Wall Street, who want costs back down and profits back up, at the same time."