Covid-19 Response Pushed U.S. Health Spending Past $4 Trillion

(Bloomberg) -- The U.S. government’s response to Covid-19 pushed up the country’s total health spending to $4.1 trillion last year, a 9.7% increase that was the biggest in almost two decades.

National health expenditures jumped in 2020 by the most since 2002 even as many Americans deferred addressing their own medical needs during the pandemic, according to actuaries at the Centers for Medicare and Medicaid Services who tally spending by government, businesses and households each year.

Their analysis, published Wednesday in the journal Health Affairs, reflects the fiscal muscle the U.S. exercised to stabilize the health-care system after the shock of Covid-related shutdowns. Federal health spending increased by more than a third compared with 2019, as Congress sent billions to replace lost revenue for doctors and hospitals, boosted payments to state Medicaid programs and invested in Covid vaccines and treatments.

Excluding the federal virus response, health spending rose 1.9% in 2020, less than half the usual pace of recent years. Many individuals put off care during the first year of the pandemic. Health spending by households barely rose, and expenditures by businesses, states and local governments declined.

“The declines in out-of-pocket spending [and] private health-insurance spending were due to lower utilization of services,” said Anne Martin, an economist at the CMS Office of the Actuary who co-authored the report. “But the federal supplemental spending far outweighed those reductions.” 

Outlier Spending

Rising health-care spending in the U.S. has long outpaced the growth of the overall economy and wages. As the U.S. economy shrank last year, the health sector’s share of gross domestic product reached 19.7%, the largest on record. 

The U.S. spent $12,530 per-person on health care in 2020, up more than $1,000 from 2019. The U.S. typically spends twice the level of other rich nations without achieving better health or longer lives.

The increase is remarkable given how Covid shut down most routine medical visits in the spring of 2020, with planned surgeries canceled, cancer screening skipped and check-ups moved online. But deferrals in normal care haven’t yet turned into a widespread wave of sicker patients. 

“We aren’t really seeing the pent-up demand that was expected,” said Krutika Amin, associate director at the Kaiser Family Foundation and the Peterson-KFF Health System Tracker, in an interview. “Some of the delayed care might have just been forgone.” 

Diverging Impacts

Even as the virus waned earlier in the year and hospitals figured out how to treat Covid patients alongside others, many people spooked by the risk of contagion stayed away. Health insurers report that declines in usual care still offset Covid expenses when virus cases surge.

That dynamic has diverging consequences for different parts of the health-care industry.

The dips would have been catastrophic for care providers if the U.S. government hadn’t come to their rescue. The Provider Relief Fund distributed $120 billion to plug shortfalls created by Covid.

Health insurers, employers and other payers experienced the other side of care deferrals: They continued to collect premiums set before Covid, even as medical costs diminished. The imbalance was so great some rebated money to their clients.

Still, the CMS report showed a 27% year-over-year spike in the net cost of health insurance, as measured by revenue at private insurers minus what they paid out for medical care. The gauge includes administrative costs, taxes and underwriting gains or losses. Plans that don’t spend a certain threshold of their premium revenue must rebate some of that to consumers in later years.

The number of people with private insurance coverage declined slightly as employers shed jobs last year, but increases in Medicare and Medicaid coverage led to a slightly smaller share of the population being left uninsured. An estimated 31 million Americans had no health coverage in 2020.

Price changes accounted for only one-third of the overall spending increase in 2020. Retail prescription drug prices declined for the third consecutive year, after accounting for rebates and increasing use of generic medications.

Uncertain Future

How the still-spreading virus influences health spending going forward remains unknown. Some shifts started by the virus, like widespread virtual care, are likely to persist, while Covid vaccines, tests and treatments add new costs.

The rise of telehealth shows the puzzle for economists trying to understand Covid’s consequences for health spending. “If it is truly a substitute, it could be more efficient,” Amin said. But if virtual care “requires multiple visits or it adds more visits, it could add more cost to the system,” she said.

The CMS actuary usually publishes projections for health spending 10 years out each spring. Its last forecast went out on March 24, 2020, nine days after the U.S. declared Covid a national emergency. It didn’t account for the impact of the pandemic, and the agency hasn’t published updated views since.

©2021 Bloomberg L.P.