COVID-19’s Impact and Implications for Health Care Cost Growth Target Programs

Sustainable Health Care Costs COVID-19 Peterson-Milbank Program for Sustainable Health Care Costs

Prior to the COVID-19 pandemic, national health expenditures were projected to continue growing faster than the economy. In response to this persistent trend, six states — Connecticut, Delaware, Massachusetts, Oregon, Rhode Island, and Washington — have established or are developing a health care cost growth target to reduce the growth in statewide health care spending to a more sustainable rate.

Although the overall impact of the pandemic on health spending will not be known until 2022, its effects on the economy and the heath system strengthen the case for statewide health care cost growth targets, which aim to make health care more affordable for families, employers, and states. Set by a state in collaboration with its health care stakeholders, a health care cost growth target is an annual per capita rate of growth that should not be exceeded. Once a target is set, the state publicly reports spending increases, creating accountability for commercial insurers and large health providers. States can mine all-payer data to identify cost drivers and then address them through coordinated action with payers and providers. Finally, employers can also use state-published spending data to inform their health care purchasing decisions with payers and providers.

COVID-19 and its associated recession have wreaked havoc on state economies, employers, and family budgets. At the same time, the public health crisis as well as social distancing and community stay-at-home orders have strained states’ health care systems. This blog post addresses the impact of COVID-19 on the economy and health care utilization, as well as the implications for state health care cost growth target programs.

Impact of COVID-19 on the US Economy

Because of the financial impact of COVID-19, many families, employers, and states have fewer dollars to spend on health care at a time when they may need it most. Close to half of all households in the United States lost some employment income since the start of the pandemic in March 2020, with lower-income households and households with children under age 18 most affected. Although the federal government has thus far provided some short-term relief to families in the form of two one-time payments and additional unemployment benefits—and President Biden recently signed executive orders offering some additional assistance, higher poverty rates are expected for 2020 than in the prior year.

The outlook for employers is uncertain, but predictions suggest a 4% to 10% increase in health care spending for employers in 2021. Meanwhile, the continued economic recession, social distancing requirements limiting retail and restaurant customers, and school and daycare closures resulting in parents dropping out of the workforce are all impacting the productivity and sales of businesses.

Temporary and permanent business closures that increased unemployment have likewise resulted in lower incomes and sales tax revenues for states (see Table 1). With smaller household and state budgets, increases in health care spending are likely crowding out spending on other necessities for both families and states.

Impact of COVID-19 on Health Care Utilization and Spending

Due to the COVID-19 pandemic and the associated decrease in health care utilization, 2020 will go down in history as the first year in which health care spending fell since the Centers for Medicare and Medicaid Services started tracking health care spending.

The decline in utilization was most acute in early spring 2020 when spending on all major service categories, except prescription drugs, dropped precipitously. By the fall of 2020, utilization rates for many services had rebounded to slightly below predicted levels or, in the case of home health and prescription drugs, higher-than-expected levels.

At the time of this writing, the volume of new COVID-19 infections and deaths has slowed since a steady climb this fall, yet overall numbers and hospitalizations still remain high.  The impact of the high volume of COVID-19 cases and overtaxed hospitals on overall utilization may result in similar patterns of decreased utilization, especially in states where non-elective care was curbed by local and state authorities.

This reduced utilization may leave under-resourced, not-for-profit, and public health care systems in a deficit. It will also have a lasting financial impact on smaller provider organizations and rural organizations, which had more trouble weathering the initial drop in utilization. This could further hasten health care consolidation, which evidence shows leads to higher prices.

“The challenges of rising health care costs and market power will still be with us after COVID-19 has passed, and further consolidation will make costs even harder to restrain.” – Michael Barnett MD, MS, Ateev Mehrotra, MD, MPH, & Bruce Landon, MD, MBA, MSc (New England Journal of Medicine, April 2020)

Implications for Health Care Cost Growth Target Programs

The spending growth abatement seen last year is unlikely to be permanent, and despite its bumpy start, the mass vaccination of Americans may lead to higher utilization rates in 2021 or 2022. In fact, utilization could exceed baseline levels as pent-up demand for delayed care is realized or if missed prevention screenings result in higher rates of disease. Policymakers should be concerned about a return to higher health care growth rates occurring in the next year or two, when employers, families, and states may still be grappling with the economic fallout of the pandemic. These factors make the case for data-driven action to address cost growth, specifically through setting cost growth targets, increasingly important.

While the COVID-19 pandemic resulted in aberrant patterns of utilization during 2020 and likely in 2021, states should still feel compelled to shine a light on health care spending at a time when provider leverage to increase prices is high and the economic pain felt by many of those subject to increased prices is acute. When states publish their health care spending data from 2020 and 2021, policymakers will be able to better identify the overall effect of the pandemic on spending. Likewise, states that are developing targets now should look toward a long-term horizon when health care costs growth is likely to pick up where it left off. By serving as stable spending guideposts, health care cost growth targets can help states contain spending for years to come.