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Health Spending: the Calm Before the Storm

By August 3, 2022Commentary

Health spending trends during the epidemic have been hard to track due to multiple factors creating more and less spending.  Overall the trend has been relatively low and a recent Altarum Institute set of briefs on spending finds that in early 2022 spending growth was very constrained.  For all of 2021, health spending was actually flat, for the first time in probably 60 years.  And for the first quarter of 2022, spending in real terms, which adjusts for inflation, declined by 1.7%.  The key to understanding what is happening is focusing on “real” health spending.  We all know that inflation is very high, and those inflation numbers are used to “deflate” spending to get a trend on health spending that ignores the variable impact of inflation.  So actual spending has grown a lot, but the inflation adjustment causes real spending to be flat or decline.   (Altarum Brief)

And the reason we see such a pronounced effect in health care is that health care prices lag.  About half of Americans are covered by Medicare and/or Medicaid, which dictate prices.  Political pressure can force increases, but the prices are set by these programs over a year in advance, and inflation has not yet been taken into account.  And contracts between private health plans and providers typically run for at least a year.  As renegotiations occur, those prices change, and they aren’t going to decrease.  Health care prices have increased recently at a 2.3% rate, compared to almost 10% in the general economy.  But another Altarum brief focussing on health care prices found that in June prices began what will likely be a dramatic rise–4% year-over-year growth for all providers and 5% for hospitals.

Notwithstanding these factors, by the end of the second half of 2022, we will see rapidly accelerating health care prices and spending.  Medicare and Medicaid are being forced to increase payments to providers by fairly substantial amounts and political pressure is mounting for even greater increases, as providers’ labor and other costs have grown substantially.  On the commercial side, private payers have made it clear that as contracts come up for renewal, health systems in particular are demanding very large compensation increases.  Premiums for the 2023 benefit year are beginning to be delivered and there will be significant jumps in those premiums.

So enjoy this brief hiatus in health care spending growth, it is about to end and health care will add to continued high inflation and budget deficits for federal and state governments.  And lots more pain for consumers.

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