Perspective: Unprecedented Decline in Health Spending is Leading the Economic Downturn  

With yesterday’s Gross Domestic Product Advance Estimate (GDP) release for the first quarter of 2020, we learned that health services contributed 47% of the stunning 4.8% decline in real economic activity. Yet those data pertained to the entire 3-month period, while the true economic devastation did not take hold until several days into March. In contrast, today’s Personal Income and Outlays data concerns only March 2020. It shows that personal income fell 2% for March compared to February, and that personal consumption expenditures fell 7.5% for the month (both in nominal dollars). The report states, “Within services, the leading contributor to the decrease was spending on health care, including physician, dental, and paramedical services.”

In this perspective, we use our Health Sector Economic Indicators^SM methodology, which emulates national health expenditure data, to analyze total health spending and selected components.

Exhibit 1. Year-over-Year Growth Rates in Health Spending

Preliminary data indicate that total health care spending in March 2020 was 5.5% lower than in March 2019 (Exhibit 1). This is the only occurrence in our historical time series of health spending (which goes back to 1989) that total spending has shown a monthly decline from the previous year. This decline was led by the two largest spending categories: hospital spending, which showed an 8.7% decline, and spending on physician and clinical services, which declined by a huge 19.3%, year over year. Spending declined in all major personal health care categories except nursing home care and prescription drugs (Exhibit 2).

Exhibit 2. Health Spending 12-Month Growth for Selected Categories

In past recessions, health care has helped to provide relief by continuing to generate revenue during and immediately following the economic decline. As we enter what is surely a new recession, this situation is reversed, with health spending being a major contributor to the downturn. Almost overnight, we have gone from concerns generated by government projections that suggest higher prices will accelerate health care spending to concerns over the financial solvency of providers.

As the current crisis fades, some of this decline might be offset by a surge in spending resulting from the pent-up demand for health care that has been deferred. But some of that demand is for routine visits and elective procedures that might simply be forgone rather than delayed.

Some of this might be good news in the long run as we return to a concern for controlling health spending in part by reducing low-value care. But high-value services are also being foregone in the current environment. There is even evidence from declining emergency care volume that patients are forgoing essential services for serious problems such as heart attacks and strokes. A challenge in a post-COVID environment will be to continue to avoid the low-value services while resuming the high-value ones.

Further details about this unprecedented decline in health spending will be included in this month’s Health Sector Economic Indicators, which we plan to release on Thursday, May 14.

Altarum’s health sector tracking work is made possible by a grant from the Robert Wood Johnson Foundation.