The Future of Children, Princeton - Brookings: Providing research and analysis to promote effective policies and programs for children.

Rapidly rising health care costs have precipitated a health care financing crisis for the nation. In this section, we compare baseline data from the 1977 NMCES with expenditure data from the 1987 NMES to explore changes in medical care spending for children and adults between 1977 and 1987. During this 10-year period, aggregate modified personal health care expenditures for children (unadjusted for inflation) increased by 234%, from $14.9 billion in 1977 to $49.8 billion in 1987. Per capita expenditures on children increased by a slightly more rapid 240%, from $217 in 1977 to $737 in 1987. The rate of increase in aggregate expenditures was slightly less than the rate of increase in per capita expenditures because the population of children declined by 1.2 million (1.7%) over the decade.

In contrast, per capita expenditures for adults ages 19 to 64 increased by only 158% during the same period, but the population aged 19 to 64 years grew by 22.5 million or 18.5%. Accordingly, aggregate expenditures on the noninstitutionalized population 19 to 64 years old grew by 207% from 1977 to 1987.

Aggregate MPHCE of the noninstitutionalized population 65 years of age and older grew even more rapidly, by 383%, from $25 billion in 1977 to $121 billion in 1987. The high rate of growth in this age group resulted from the combination of rapid growth (281%) in per capita expenditures, from $1,124 in 1977 to $4,277 in 1987, and an increase in population of 6 million, or 27%.

Overall, per capita expenditures on children increased 20% more rapidly than per capita expenditures on adults; however, because the number of children declined slightly while the number of adults increased by 28.5 million, children's MPHCE declined to 13.7% of total expenditures in 1987 from 14.5% in 1977.

It is useful to examine separately factors that contribute to growth in health care costs. Although such analyses may not explain why costs increase, they can help in assessing the relative contributions of the various factors which fuel growth. A frequently performed analysis allocates the change in health care expenditures among four factors: general price inflation, industry- specific price inflation, population growth, and all other factors.^3,16

The results of decomposing the growth in per capita MPHCE for children between 1977 and 1987 are presented in Figure 5. General and medical price inflation have been found to account for a substantial part of the growth in personal health care expenditures for the general population.³ They appear to account for almost half of the overall increase in per capita expenditures for children between 1977 and 1987. In addition, an increase of almost 4 percentage points in the proportion of children in the 0- to 2-year-old age group—the group with the highest per capita expenditures—resulted in a 3% increase in per capita expenditures for children 0 to 18 years old.

Once price and population changes are explicitly represented, the "all other factors" in this analysis is a measure of the increase in the average "intensity" of health care services delivered on a per child basis (more health services per child). This residual term, which also includes measurement error, accounted for 48% of the increase in MPHCE for children during the 1977–1987 period.

Further analyses indicate that increased expenditures on both inpatient and outpatient hospital services accounted for more than 75% of the increase in the resource intensity of children's MPHCE. Per capita expenditures on hospital care for children increased by 379% between 1977 and 1987, while per capita expenditures on all other personal health care services for children increased by 167%. Hospital expenditures increased most rapidly for those 0 to 2 years old, by more than 650% between 1977 and 1987. As a result of this rapid growth, the proportion of hospital expenditures accounted for by this age group grew to 47% of all expenditures on hospital care for children in 1987 from 29% in 1977. Overall, close to 40% of the increase in intensity of all medical care for children of all ages over the period was the result of an increase in the intensity of hospital care for children in the 0- to 2-year-old age group.

It is tempting to speculate that increased expenditures for this age group reflected the rapid rate of technological advance in the care of high-risk, very low birth weight babies in neonatal intensive care units and the proliferation of these units throughout the hospital system. (See the Racine, Joyce, and Grossman article in this journal issue.) The increase in the level of real medical care services received by these infants and young children may also reflect the increased health care needs of high-risk infants who survive the neonatal period. At this point in time, however, we do not have access to NMES data at a level of detail which would allow investigation of this conjecture.