U.S. healthcare costs continue to increase at a declining rate

Data released today by S&P Indices for the S&P Healthcare Economic Composite Index indicate that the average per capita cost of healthcare services covered by commercial insurance and Medicare programs increased by 6.19% over the 12-months ending February 2011. This is a drop from the 6.31% increase in annual growth rate posted in January 2011 for this index.

Overall healthcare costs continue to increase at a declining rate.  In its six-year history, the highest annual growth rate for the Composite index was during the 12-months ending May 2010, when it posted +8.74%.  With February's report of +6.19%, claims costs growth rates have decelerated 2.5 percentage points in just nine months.

Over the year ending February 2011, healthcare costs covered by commercial insurance rose by 7.97%, as measured by the S&P Healthcare Economic Commercial Index. Medicare claim costs rose at an annual rate of 3.22%, as measured by the S&P Healthcare Economic Medicare Index. This is the lowest annual rate of growth posted for the Medicare Index in its six-year history.

The S&P Healthcare Economic Indices estimate the per capita change in revenues accrued each month by hospital and professional services facilities for services provided to patients covered under traditional Medicare and commercial health insurance programs in the U.S. The annual growth rates are determined by calculating a percent change of the 12-month moving averages of the monthly index levels versus the same month of the prior year.

"After having picked up slightly in January, the annual growth rates in healthcare claim costs continued to decelerate in February 2011," says David M. Blitzer, Chairman of the Index Committee at Standard & Poor's. "The Composite Index rose by 6.19%, the Commercial Index was up 7.97% and the Medicare Index was up 3.22%, compared to their February 2010 levels. These are down 0.12, 0.08 and 0.21 percentage points from their January 2011 prints, respectively. In addition, the annual growth rate of the S&P Healthcare Medicare Index reached a new low of +3.22% -- the lowest in its six-year history. The February 2011 S&P Healthcare Economic Hospital and Professional Services Indices annual growth rates were +5.51% and +6.68%, respectively, down 0.16 and 0.10 percentage points from their January prints.

"While all of the indices have seen their growth rates decelerate over the past year, Medicare claim costs, particularly those associated with hospitals, have witnessed the largest slowdown.  Both the Medicare Composite and the Hospital Medicare Indices posted the lowest growth rates we have seen in their six years of history.

"The slowdown in Medicare claim costs may be having some impact on other factors in the health care industry. In examining some of the variables we use to calculate these indices, we observed some interesting trends in hospital and physician wages and employment which are likely a result of the changes we are observing in claims costs. While growth in hospital wages has remained relatively stable over the past year, in the range of 3.0 - 4.0%, hospital employment growth has slowed down significantly. Between 2008 and early 2009, annual hospital employment growth rate was in the 2.0 - 3.0% range; however, since the middle of 2009, the rate has been consistently below 1%.

"With physicians, who may have more flexibility in their choice of insurance contracts, the impact is not as severe.  Physician wages were growing by about 5.4% as of February 2011, almost double their pace of 12-months ago; employment has seen a slowdown, but still registered an annual growth rate around 2.5% as of February. If the growth in insurance claim costs continue to slow down, whether due to contract negotiations for commercial insurance, or Medicare regulations or both, we will likely see an impact on employment, wages and benefits in the healthcare industry."

The S&P Healthcare Economic Composite Index is a weighted average of the S&P Healthcare Economic Commercial Index and the S&P Healthcare Economic Medicare Index.  Alternatively, it is a weighted average of the S&P Healthcare Economic Hospital Index and the S&P Healthcare Economic Professional Services Index, as each of these indices has the analogous Commercial and Medicare component.

As part of our annual review process, with last month's update, S&P Indices published the weights used in the S&P Healthcare Economic Indices calculations for 2011. We reviewed various weights and factors used in the healthcare models and updated those with more recent data. These revisions do not include changes to historical weights. Please refer to the methodologies posted on our Web site at www.healthcareindices.standardandpoors.com to review these updates.