Budgets, not piecework, work best

... especially in trying times. The latest health care spending report makes the case for payment reform

The Covid-19 pandemic had far-reaching consequences on the health care system’s spending priorities and who paid for care. When demand for routine services went down, the government ramped up its spending on public health and provided emergency relief to help providers keep their doors open.

The result, according to the 2020 spending report released by government economists yesterday, was that health care spending grew 9.7% last year — more than double 2019’s rate and the fastest growth since 2002. Since the overall economy suffered a 2.2% decline, health care share of total economic activity surged to 19.7% — the highest level ever.

Both factors have switched directions in 2021. The economy is growing again (although another Covid surge from the omicron variant could put a damper on that, as Federal Reserve Board chairman Jerome Powell noted this week). And health care spending shows signs of returning to previous patterns, which over the last decade has seen growth rates similar to the overall economy.

What remains to be seen is whether who pays for care will return to previous levels. Governments, through Medicare, Medicaid, subsidies for Obamacare plans and a raft of other programs, picked up 51% of the $4.1 trillion total tab in health care spending last year, up from 45% in 2019. That was entirely driven by a 36% increase in federal spending, which included substantial amounts to providers through the provider relief fund and paycheck protection program. Spending by cash-strapped state and local governments declined 3.1%.

On the other hand, spending by the private sector (businesses, individual out-of-pocket expenses and charitable contributions) fell 0.6%. But that small decline masks the huge decline in business-supplied health insurance (down 3.1%). Spending by households actually increased 1.1% during the pandemic. Private business spending on employee health insurance fell to just 17% of total spending, compared to 36% for the federal government and 26% for households.

Where did all those laid off people losing their private health insurance go? Spending by Medicaid programs across the country surged 9.2%. Thanks to this invaluable social insurance program (or, to use American Prospect co-editor Robert Kuttner’s preferred phrase, social income), the total number of uninsured actually fell last year to 31.2 million or 9.5% of the population in 2020, down 1.9% from 2019.

One more set of numbers of interest: Despite government taking a much larger role in providing health care, its cost of administration (the amount not paid in direct health care servicess) rose just 2.1%. The net cost of private health insurance, despite caring for fewer people, rose a staggering 27.4%. Someone should investigate.

Here’s the enduring lesson from the government’s response to Covid-19. Health care is a social service, paid for by social insurance (even privately-supplied insurance is nothing more than a way to socialize the costs incurred by people who get sick, none of whom could pay for the actual cost of care on their own). What particular services will be needed at any particular point in time is unknowable at the individual level, but is actuarially knowable at the population level.

Likewise, emergency situations — like a pandemic — are inherently unpredictable. But, in an era of rapid global warming and galloping social decay, we can be certain about their eventual arrival, and, unless we redress both those issues, their greater frequency.

In 2020 and 2021, the government stepped up with huge grants to shore up a health care system faltering under its emergency burden, even as the routine payments through the fee-for-service insurance system were collapsing. In essence, the federal government put providers on a budget. Budgets gave providers the flexibility to maintain staffing levels and deploy resources where they are most needed to meet the emergency.

The same is true during normal times.

We know people can avoid expensive hospitalizations and the high cost of chronic disease care if they are provided some measure of social security. The people who require the most health care in our society suffer from poor housing and poor nutrition; lack stable employment and suffer from the ill-effects of discrimination. Many have no access to services that can address their mental health, substance abuse and related social problems.

Fee-for-service health care is the band aid we slap on the diseases that are the result of those underlying social realities. Replacing fee-for-service payments with fixed budgets — as was essentially done during the Covid-19 pandemic — will give hospitals, doctors and other providers the flexibility to spend those resources in ways that tackle the many of the root causes of so much of the ill-health in our society.