Healthcare Spending Was Stable in 2019 — But Only on the Surface

Ken Terry

December 17, 2020

Healthcare spending in 2019, before the COVID-19 pandemic, might seem like ancient history. Nevertheless, it holds clues to what healthcare costs might look like after we extricate ourselves from this quagmire with the help of the new vaccines.

National healthcare spending grew 4.6% in 2019 to $3.8 trillion, or $11,582 per person, representing 17.7% of the economy, according to a report from the Office of the Actuary in the Centers for Medicare & Medicaid Services (CMS). The 2019 growth rate was just a shade less than the 4.7% increase in 2018.

However, the study, which was published in Health Affairs, shows that the underlying rate of cost growth was actually higher than that. Personal healthcare spending — a measure of what was spent on all healthcare goods and services — jumped 5.2%, compared with the 2018 growth rate of 4.1% in that category. This accounts for 84% of national health expenditures. The faster growth in 2019 was propelled by accelerated growth in spending for hospital care, retail prescription drugs, and physician and clinical services.

The pickup in spending on healthcare delivery was offset by a decline in the net cost of insurance, the CMS actuaries noted. Insurance spending dropped 3.8%, mainly because of the suspension of a health insurance tax imposed by the Affordable Care Act. This tax, charged to private health insurers, was collected from 2014 to 2016. It was suspended in 2017, reinstated in 2018, and tabled again in 2019.

On a per capita basis, national health spending grew 4.1% in 2019, about the same as the 4.2% increase in 2018. Per capita spending growth reflected faster growth in the residual use and intensity of healthcare goods and services and slower growth in medical prices, the CMS actuaries said.

Medical prices increased 1.1% in 2019, compared with 2.3% in 2018. The utilization and intensity of services rose 2.5% in 2019, compared with the 1.4% growth in 2018. The rate of growth due to changes in demographic factors, such as aging, remained at 0.5% in 2019.

In a news conference held by Health Affairs, Anne Martin, lead author of the report and an economist in the national health statistics group in the CMS Office of the Actuary, said the use and intensity of services such as hospital care, physician and clinical services, and retail prescription drugs all increased at a faster rate in 2019 than in 2018.

The increased growth rate in drug spending — 5.7% in 2019 vs 3.8% in 2018 — was related to the higher volume of prescriptions and an increase in the use of expensive specialty drugs, she said.

Nevertheless, drug prices as a whole declined for the second year in a row. Because of a decrease in the volume of brand-name drugs and lower prices for generics, Martin noted, drug prices dipped by 0.4%; in 2018, it declined by 1%.

Hospital spending grew 6.2% in 2019, up from 4.2% in 2018. Yet hospital prices increased just 2% in 2019, compared with 2.4% the previous year. Nonprice factors, such as the use and intensity of goods and services, grew 4.2% in 2019, compared with 1.8% in 2018.

Similarly, spending on physician and clinical services increased 4.6% in 2019, vs 4% in 2018. Price growth remained constant at about 0.8% in both years, while utilization and intensity of services grew significantly.

Insurance Tax Holiday

Largely because of the abeyance of the insurance tax, private health insurance costs advanced only 3.7%, down from 5.6% in 2018. Enrollment in private insurance increased just 0.5%. On a per-enrollee basis, private insurance spending rose 3.2%, following 6.4% growth in 2018.

Medicaid spending was up 2.9% in 2019, similar to the growth rate of 3.1% in 2018. Faster spending growth for goods and services was counterbalanced by a decline in the net cost of insurance, again due in part to the insurance tax moratorium that applied to Medicaid managed care plans. On a per-enrollee basis, Medicaid spending accelerated to 4.5% in 2019, compared with 4% growth in 2018.

Medicare expenditures jumped 6.7% to nearly $800 billion in 2019. By comparison, Medicare spending increased 6.3% in 2018. Medicare enrollment growth held steady at 2.6% in both years. Per-enrollee Medicare spending grew 4%, up from 3.6% in 2018.

Notably, spending in the fee-for-service Medicare program increased by only 2.2% in 2019, a smaller rise than the 3% seen in 2018. In contrast, Medicare's private health spending, mainly in Medicare Advantage (MA) plans, increased 14.5%, up from the 12.6% growth in 2018. It accounted for 39% of total Medicare spending in 2019.

Medicare Advantage Costs Rise

Nearly all of the enrollment growth in the Medicare program in recent years has been in MA plans, Martin said. Although the rise in the number of beneficiaries in these plans accounts for much of the spending increase, she said, spending per MA plan enrollee has also been growing.

In fact, spending per beneficiary in MA plans grew 6.3% in 2019, compared with only 2.4% for people in fee-for-service Medicare, Martin said.

"Medicare Advantage plans have been seeing increases in [spending growth] rates across the board for different locations and among different types of enrollees," she explained. "It's a different type of payment mechanism than fee-for-service Medicare, so the two can't be directly compared."

Pressed further about why costs of MA plans are rising so much faster than costs in the traditional Medicare program, she said, "Managed care is just a different option available to beneficiaries. It's not intended to be directly comparable to fee for service or intended to save money. It's intended to provide options to seniors, and the program has been expanding in the last few years."

However, contrary to her statement, Congress did intend for private managed care plans to save money at the time they were first incorporated into Medicare as part of the Balanced Budget Act of 1997. In fact, one analysis projected that Medicare managed care plans would account for a quarter of the $400 billion that the legislation was expected to save over 10 years.

Overall, Medicare spending rose more quickly than private health spending in 2019 and 2018, Martin acknowledged. One reason for that was the growth in MA plans. At the same time, the overall growth rate of national health spending was fairly stable from 2014 to 2019. But the latest CMS data indicate that the underlying trend in 2019 was for higher cost growth in healthcare delivery.

It's not clear what this will mean after the pandemic is over. If a recent Kaiser Family Foundation study is on the mark, this year, US health spending might even decline for the first time since the 1960s.

In the long run, however, patient demand will reignite, perhaps at a higher level than before the pandemic. When that happens, look for the trends that occurred before COVID-19 to return.

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