Latest healthcare spending data paint a complicated picture of industry challenges and opportunities

• Healthcare spending surged during the first year of the COVID-19 pandemic even as spending on direct care slowed significantly, according to new data.
• There are no easy solutions to make spending on hospital care more efficient within the current payment structure, a healthcare economist said.
• Public health should be a greater emphasis in healthcare spending policies, another expert said.

Newly reported healthcare spending patterns from the first year of the COVID-19 pandemic reflect an industry trying to get its bearings amid both a public health emergency and daunting long-term trends.

An annual report by CMS actuaries found that spending on healthcare surged in 2020, increasing by 9.7% after rising by 4.3% in 2019. The 2020 jump, to $4.1 trillion, was the highest since 2002. Healthcare amounted to 19.7% of GDP, up from 17.6% the year before.

“We really saw this anomalous year in which use of care went down across the board but spending went up,” Laura Tollen, senior editor with Health Affairs, said during a January webinar hosted by the journal.

Federal funding — through Provider Relief Fund distributions, Paycheck Protection Program loans and public health spending — made the biggest difference from pre-pandemic years.

“Normally, that’s just a tiny sliver in the pie chart,” Tollen said.

Taking federal programs out of the picture, spending increased by only 1.9% in 2020. Spending growth for private insurance and Medicare slowed, while Medicaid spending accelerated because of increased enrollment rather than on a per capita basis.

Spending on hospital care increased by 6.4%, which was virtually flat compared with 2019. Physician spending rose by 5.4%, compared with 4.2% the year before.

Although 2021 actuarial data won’t be published until sometime toward the end of 2022, recent data from the U.S. Bureau of Labor Statistics indicates the 2021 increase in healthcare services spending far trailed economywide inflation. While the consumer price index jumped by 7%, the 12-month increase was 2.5% for medical care services and 0.4% for medical care commodities (i.e., drugs, equipment and supplies). The inflationary impact of a prolonged spike in labor costs remains to be seen, however.

Tighter spending could have negative repercussions

Even at a time when stakeholders are looking closely at how to make healthcare spending more efficient, the paltry jump in direct-care expenditures in 2020 shouldn’t be cause for celebration, a healthcare economist said.

“It is not in any way a good thing that spending went up by only 1.9%,” Sherry Glied, PhD, dean and professor of public service at New York University’s Robert F. Wagner Graduate School of Public Service, said during the Health Affairs webinar.

“If we’d had better ways to reduce morbidity and mortality, if we had enough ventilators and PPE early on, if we had not deferred some of the necessary and routine care in the early days of the crisis — a lot of care is ineffective and wasteful, but a lot of care is not ineffective and wasteful.”

Using percentage of GDP as a relevant metric may miss the mark, especially amid the pandemic, she added. The story should be less about how much healthcare spending went up and more about the degree to which the economy contracted, with GDP falling by 2.2%.

The cost to treat patients with COVID-19 “was a really minor component of the economic burden of the pandemic,” Glied said. “The much greater costs were in the denominator of that GDP share and outside the GDP calculation altogether [in terms of] the human consequences of disease for individuals, for their families, and the enormous, crazy cost of the precautions taken by individuals and societies to avoid the disease.”

She added, “We don’t think very much about how spending on healthcare has direct effects on the denominator, but it certainly does have an effect on well-being that we also don’t account for.”

Federal aid can’t address underlying issues

It’s widely known that COVID-19 cases have led to high-cost hospitalizations, especially during the early part of the pandemic. An October 2021 study In the journal Advances in Therapy quantified the trend, reporting that among nearly 250,000 patients who were hospitalized for COVID-19 in 2020, median length of stay was six days and median cost was $11,267. The cost rose to $13,443 among the subset of patients (36%) who were admitted to the ICU.

The prospect of such costs, along with a loss of revenue from disrupted operations, spurred Congress to establish the $178 billion Provider Relief Fund as part of the CARES Act in March 2020. But those payments don’t solve the structural cost issues facing hospitals, Glied said.

“We’ve always known that hospitals are high-fixed-cost, low-marginal-cost businesses that we pay on an average-cost basis, which creates all kinds of problems,” she said. “In some ways all of that pandemic fiscal support really responded to that reality. It wasn’t that the marginal cost of treatment had done anything in particular. It was really that we couldn’t cover fixed costs with average-cost payment when you didn’t have enough volume.”

She said a two-track payment system may be more appropriate, where capital costs and marginal costs for admissions would be paid for out of distinct pools.

Craig Garthwaite, PhD, professor and the director of the Program on Healthcare at Northwestern University’s Kellogg School of Management, said spending policies could evolve to better support struggling hospitals.

“It might require us to think differently about the Medicaid system overall,” Garthwaite said during the Health Affairs webinar. “Maybe having certain hospitals get more [disproportionate share hospital] funding. There might be more of a conversation that we want to have about how we think about county and safety net hospitals, and how we fund them.”

It might be appropriate for access to change in conjunction with such approaches, Garthwaite said. For example, perhaps Medicaid and uninsured patients would be directed to “hospitals that look more like souped-up FQHCs,” meaning federally qualified health centers.

But big changes to hospital spending are unlikely in the foreseeable future.

“Everyone likes their hospital and doctor,” Garthwaite said. “If your health plan is reducing the amount of spending that you have at your local hospital, I think the politics of that are just very bad right now.”

Targeted spending would address other segments

An ideal scenario would entail shifting some spending to support the public health infrastructure and tools and therapeutics that can mitigate the next pandemic, Garthwaite said.

“Some of that money is going to go to waste, and that’s kind of what public health is,” he said. “It’s an insurance capacity that we want to have.”

Glied and Garthwaite said telehealth — specifically for behavioral health — merits watching as an object of spending that could pay big dividends but also could result in higher volumes of low-value, ineffective care.

And while payment reform potentially would improve the value of care across settings and modalities, capitation isn’t guaranteed to be an optimal solution.

“I don’t think anyone has the answer to the question yet about what those systems look like in terms of their financial returns over the next three to five years,” Garthwaite said. “In theory, the reduction in the use of all these medical services [during the pandemic] should have some negative health consequences. If it doesn’t, then we might want to have some conversations about are we using too much care in different settings, and [about] what we pay people.”