May 29, 2020
Note to readers: Altarum will release our next series of Health Sector Economic Indicators briefs on Friday, June 12.
May 2020 data, including April Personal Income and Outlays released this morning, paint perhaps the strangest U.S. health sector picture ever: plummeting health care spending and employment with (weighted) prices spiking. In this perspective, we use our Health Sector Economic Indicators framework to analyze health spending and selected components, and provide updates on labor and price trends.
What Do the Data Show?
Exhibit 1: Year-Over-Year Growth Rates in National Health Spending
Preliminary data indicate that personal health care spending in April 2020 was 30.1% lower than in April 2019 (Exhibit 1). While March was the first time in our data (which goes back to 1989) we had seen a year-over-year decline in personal health spending, the April reading makes March almost look like a rounding error!
Spending changes by component are shocking, yet not unexpected (Exhibit 2). The two largest categories, hospital spending and physician and clinical services spending, fell by a whopping 40.7% and 40.9%, respectively. Dental services, having become the poster child of delayed discretionary care, declined by a huge 60.8%, year over year. And, as in March, spending declined in all major personal health care categories except nursing home care and prescription drugs, which rose 6.3% and 5.1% year over year, respectively. Interestingly, the prescription drug growth rate dropped from the 14.0% seen in March, when patients may have been stocking up under uncertainty about access during stay-at-home orders.
Exhibit 2: Health Spending 12-Month Growth for Selected Categories.
From these April spending data:
Using estimates of gross domestic product (GDP) provided by Macroeconomic Advisers, we see the health spending share of GDP fall to 15.7%. This compares to 17.1% in March and a mostly steady reading prior to the downturn near 18% over the past four years. It is noteworthy that, at least for now, health care spending is falling faster than the overall economy.
As we reported in our May 8 blog, consistent with these spending drops, health care has shed nearly 1.5 million jobs, losing all the gains of the past five years in the span of only two months. We wrote, “While parts of the health system are stretched to the breaking point, the business of routine health care is shut down like the rest of the economy, and providers are facing unprecedented financial losses.”
Exhibit 3: 12-Month Growth Rates in Health Care Price Index & GDP Deflator.
On the health care prices front, while prices of individual health care components were stable, combining them to create an overall index of health care prices using radically changing spending weights caused the Health Care Price Index (HCPI) to increase (Exhibit 3). Following five months near 2.0% growth, the HCPI shot up to 2.4% in March and 3.1% April 2020. Exhibit 4 displays April 2020 price growth compared to April 2019 and April 2018 for the HCPI and ten components.
Exhibit 4: Annualized Percent Change in Prices for the Major Components of National Health Expenditures
What’s Happening and What’s Next?
As reflected in the unprecedented declines in health spending and jobs, despite heroic efforts by a dedicated health care workforce, we know that an extensive amount of care (not all of it discretionary) has been delayed or cancelled over the past few months. New polling data from the Kaiser Family Foundation finds that 48% of adults “say they or someone in their household have postponed or skipped medical care due to the coronavirus outbreak.”
We are now beginning to see a return to more normal behavior as hospitals are re-opening to discretionary care, including surgery and other procedures.
Also, after declining by approximately 60%, visits to ambulatory care practices are coming back to life, though some care may remain in the newly energized telemedicine category – surely a welcome development. A possible ray of light that is receiving growing attention is the possibility that low-value care can be kept at bay while utilization ramps back up. Instead of rebuilding the health system can we reorient it?
We have previously noted this newfound topsy-turvy world where, rather than cushioning an otherwise dire economic situation, the health sector is now an accessory to the crisis. It is clear that the economic decline will be unparalleled – for example, the St. Louis Federal Reserve Bank predicted today that GDP would drop by 49.8% in the second quarter of 2020 – and a growing chorus of analysts is predicting a slow (non-“V”) recovery. Nonetheless, as we noted above, health care appears to already be on the mend. Much care will be foregone for good (many health services research PhD theses will determine how much and the extent to which this care was of high value and truly needed), but pent-up demand should prevail to increase utilization for at least the next few months.
Looking ahead, new employment data will be released on June 5. It won’t be pretty. A leading indicator is first time claims for unemployment insurance which, as of yesterday, showed 40.8 million filings over the past 10 weeks (likely surpassing, in speed and magnitude, the unemployment seen in the Great Depression). But we do expect that health care employment will begin to recover over the summer as furloughed workers are brought back to meet returning demand.
There is more than enough pain – physical, mental, and financial – to go around. The health and economic consequences are apparent but unlike in past recessions, this is the first with the Affordable Care Act in place. In an article released yesterday, Larry Levitt writes, “The current economic crisis could be the ACA’s test of how well it can catch people who fall out of the employer health insurance system.”
We will continue to closely monitor this utterly unprecedented situation with a labor-related blog on June 5 and the next full set of Health Sector Economic Indicators briefs on Friday, June 12.
Altarum’s health sector tracking work is made possible by a grant from the Robert Wood Johnson Foundation.
Co-Director of Sustainable Health Spending StrategiesAreas of Expertise
For over 35 years, Paul Hughes-Cromwick has been involved in health care economic and policy analyses including economic forecasting and health sector economic indicators. Paul leads Altarum’s monthly series of timely briefs covering national health spending, employment, prices and health care utilization. Paul has a bachelor’s degree from the University of Notre Dame and a master’s degree from Clark University.
Fellow and Research Team LeaderAreas of Expertise
Dr. George Miller is a fellow participating in Altarum's efforts to track national spending, analyze the drivers of spending growth, and quantify a sustainable spending growth rate. Dr. Miller received his BSE, MSE, and PhD degrees in industrial and operations engineering from the University of Michigan, where he subsequently served as an adjunct assistant professor.
Program Director, Health Economics and PolicyAreas of Expertise
With over 30 years of experience working with government, commercial, and philanthropic clients, Ani leads Altarum research and policy analyses in areas such as health spending and workforce and the economic impacts of investments in improving health and advancing racial equity. Ani holds a bachelor’s degree in mathematics and a master’s degree in applied economics with a concentration in labor economics, both from the University of Michigan.
Research Director, Health Economics and PolicyAreas of Expertise
Corey develops tools that model the societal benefits of improved population health and conducts economic analyses of health sector policies. He holds a master’s degree in public policy from the University of Michigan and a bachelor’s degree in economics from Washington University in St. Louis.