Healthcare spending declines for first time since 1960

By Jeff Lagasse for Becker’s Hospital Review

Adjusted for inflation, healthcare spending in the U.S. declined for the first time in more than half a century in 2021, according to a new report from Altarum.

The first time the Centers for Medicare and Medicaid Services officially tracked health spending was in 1960, and since that time growth in national health spending has always been positive, and greater than economy-wide inflation.

This has held true even in historical periods of high economic inflation, including the 1970s, meaning that healthcare’s overall cost burden has increased relative to consumer purchasing power, and taken up an ever-greater share of GDP and household income.

That all changed in 2021, when real healthcare spending growth was flat. And in the first quarter of that year, real healthcare spending actually declined 1.7% year over year. That’s seven full percentage points lower than the long-term average.

Because of that, health spending has also declined as a percentage of GDP, falling from a peak of over 20% in mid-2020 to 18% in May 2022. Overall economic growth has rebounded much faster than health spending post-2020.

WHAT’S THE IMPACT?

This decline in healthcare spending is driven largely by a decline in healthcare price growth relative to economy-wide inflation. Beginning in Q2 2021, measures of economy-wide inflation increased rapidly, initially driven by increased prices for commodities such as cars and computer chips, then was followed by a more moderate increase in economy-wide services prices in late 2021 and 2022.

Over that time, healthcare price growth has stayed at or even fallen below its long-term average growth. This slow growth in healthcare prices has been a major factor in keeping overall spending under control relative to other economic components, and is likely a result of delays in the contract negotiations and government policies that set healthcare prices in advance for future years.

As 2022 prices for healthcare and services begin to reflect higher negotiated rates for care, Altarum expects the healthcare price index to accelerate.

The decline in health spending is offering a bit of respite to otherwise extremely tight consumer budgets in 2021 and 2022, when inflation made the costs of most other goods and services far more expensive. This is due to the combined rebound in overall demand following the COVID-19 pandemic, as well as persistent supply and labor constraints on producers.

THE LARGER TREND

Despite indications of a slowing healthcare cost trend over the past 18 months, many of these impacts are expected to be short-lived. The data on health spending trends is still impacted by one-time federal health expenditures such as the Medicare Accelerated and Advance Payment programs. And some of the initial 2020 bump in health spending and subsequent year-over-year declines are artificially driven by one-time injections of cash during the pandemic for healthcare and public health initiatives.

A return to more normal federal spending patterns may cause health expenditure growth rates to return to long-term trends, the report found.