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Health Care Spending

By May 14, 2021Commentary

A number of previously highlighted policy issues have gotten submerged during the epidemic but will resurface.  One is health care prices and spending.  Health care is 20% of the US economy.   That is ultimately paid for by consumers, in the form of taxes for government programs like Medicare and Medicaid, which account for half of all health spending, or in the form of health insurance premiums for private insurance.  Private employment-based insurance gets paid for by employees directly in premium sharing, or indirectly by reduced wages, or by consumers in higher prices for goods and services.  Spending is a function of the amount of use of services and goods multiplied by the price of those goods and services.  Spending increases or decreases as either the amount of health care used increases or decreases and prices rise or fall.  The spending problem in the US has been almost exclusively a problem of high prices and price increases.  We actually have a very efficient health system.

The epidemic has had some interesting effects on health spending.  Coronavirus obviously caused a substantial increase in some spending.  At the same time, massive amounts of care has been deferred, most of it needed.  An under-appreciated aspect has been that most of the people who died from, or with, CV-19 were quite elderly and had average high health spending.  So Medicare in particular will see a temporary decline in spending due to this drop in that population with higher spending.

The Altarum Institute has a long running series of briefs on health care spending and prices, which I regularly track and report on.  The April spending brief is here.  (Altarum Brief)   Health spending was essentially flat in 2020, declining quite significantly early in the year before rebounding.  Now it is beginning to rise rapidly, with the latest year-over-year data suggesting a 5.5% increase.  The rise is most dramatic in home health care, and  while growth has rebounded in other categories, not at the same rate.

The second brief charts price changes.  (Altarum Brief)   In March, on a year-over-year basis, those prices rose 2.5%, down slightly from February’s 2.6% growth.  Hospital prices were up 4.8% and accelerating.  Private payers are seeing the highest price increases, as Medicare and Medicaid set prices by fiat.  Medicaid hospital prices rose during the epidemic but due to CV-19 payments.  Health care utilization was down 3.8% year-over-year in February, compared to declining by 9.6% in March of 2020.  This indicates how dramatically utilization fell and still has not recovered to pre-epidemic levels.  I expect to see spending really surge during the rest of 2021, causing issues for employers battling a number of other inflation challenges.  That spending rise will be led both  by rebounding utilization and price increases.

Join the discussion One Comment

  • Andrew S says:

    Agree with this. And the conclusion will ultimately lead to more government controlled health care.

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