The 2020 national health expenditures report

The COVID-19 pandemic has been a transformative global event with far-reaching effects that are still unfolding. The recent annual report on national health spending from the Office of the Actuary’s National Health Expenditures Accounts Team in the Centers for Medicare and Medicaid Services (CMS) documents some of the dramatic shifts the pandemic caused in U.S. health care, including changes in the sources and uses of system funding. The following are some of the more interesting takeaways from the analysis:

 

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  • Total Expenditures. National health expenditures (NHE) reached $4.1 trillion in 2020 — a 9.7 percent increase over the 2019 level of $3.8 trillion. While health expenditures were rising rapidly last year, the U.S. economy was shrinking because of reduced activity from social distancing requirements. Overall, GDP fell by 2.2 percent in 2020 compared to 2019 — the largest one-year decline since 1938. Together, these shifts pushed NHE up to 19.7 percent GDP in 2020. To put that in perspective, national health spending was equal to 17.6 percent of GDP in 2019, 13.3 percent in 2000, and 8.9 percent in 1980.

 

  • The Federal Government. The increase in NHE in 2020 was driven by the federal government’s response to the pandemic, not more use of services by patients. In a series of bills passed by Congress starting in February 2020, the government provided substantial direct aid to hospitals and physician practices, purchased vaccines and other supplies, ramped up public health activities, provided new subsidies for enrolling in health coverage, increased the federal share of Medicaid spending, required states to suspend monthly Medicaid eligibility reassessments, and supported health systems and individual practices with business loans that can be forgiven. In Medicaid alone, federal expenditures increased by 19 percent in 2020. The special financial assistance Congress approved to help the health sector weather the pandemic was included in the “other” category of federal health spending, as were vaccine purchases and new public health resources. In 2020, spending under this heading totaled $559 billion, a 124 percent increase over 2019. Altogether, the federal government’s pandemic interventions pushed its health spending up from $1.1 trillion in 2019 to $1.5 trillion in 2020 — a 36 percent increase.

 

  • State and Local Governments. State and local government spending on health care dropped in 2020 to $588 billion from $607 billion in 2019 — a 3.1 percent decline. The reduction occurred because the federal government increased its share of total Medicaid spending for the duration of the pandemic by 6.2 percentage points over the matching rates that otherwise would apply. The added federal support was passed to cushion the economic blow from the pandemic and prevent state service cutbacks that might exacerbate the recession.

 

  • The Private Sector. Spending by businesses and individuals on health care fell by 0.6 percent in 2020 compared to 2019, from $2.05 trillion to $2.04 trillion. The decline was due to a large drop in enrollment in employer-sponsored health coverage, as many millions of workers lost their jobs due to the recession. Overall, spending on health care by private businesses fell by 3.1 percent in 2020. Individual patients also experienced a reduction in their expenses. In 2020, consumer out-of-pocket spending was $389 billion, or 3.7 percent below the level recorded in 2019. This decline was due in part to the postponement of many elective procedures and office visits.

 

  • The Uninsured. Although the pandemic triggered a spike in unemployment, the number of uninsured did not increase as had been feared when the crisis began. Enrollment in private health insurance fell to 200.3 million in 2020, from 202.0 million in 2019, but an increase in Medicaid participation more than made up for it. The average number of Medicaid beneficiaries rose from 72.3 million in 2019 to 76.0 million in 2020. The net effect of these shifts was a reduction in the number of uninsured Americans, from 31.8 million in 2019 to 31.2 million in 2020.

 

  • Medicare. In 2020, the pandemic may have accelerated the long-term trend in Medicare away from traditional fee-for-service insurance, as Medicare Advantage (MA) plans saw an increase in enrollment of 9.5 percent. MA plans now provide Medicare-covered benefits for 40 percent of all program enrollees.

The jump in MA came at the expense of traditional fee-for-service, which experienced a drop in enrollment of 2.2 percent relative to 2019. With fewer beneficiaries, fee-for-service accounted for 55 percent of total program spending in 2020, down from 61 percent in 2019.

 

  • Use of Funds. National health spending rose rapidly in 2020 but not because patients received significantly more services. In fact, the pandemic induced a deceleration in the growth rate for most categories of care, such as dental exams and procedures, which fell by 0.6 percent in 2020 compared to 2019. Instead, spending on hospitals and physician practices rose only because the government provided them with direct financial support which was not connected to the provision of services to patients. Within Medicare fee-for-service, spending on various categories of goods and services fell by 5.5 percent in 2020 compared to 2019. As noted previously, most of the additional funding allocated to the health sector in 2020 went toward non-traditional uses, such as direct federal support of hospitals. Spending on public health agencies and programs also rose substantially in 2020, to $224 billion, an increase of nearly $119 billion over what was spent in 2019.

 

The U.S. was underprepared for the COVID-19 pandemic, which meant Congress had to scramble to come up with a response plan in early 2020. All in all, the improvised measures put in place by the federal government worked as planned to stabilize the health sector during a genuine crisis, even as they also pushed NHE toward 20 percent of GDP. With the pandemic still running its course, it is too early to know if the patterns that emerged in 2020 will have lasting effects.

James C. Capretta is a columnist for State of Reform and a senior fellow at the American Enterprise Institute.