New data on national healthcare spending highlights the constraints facing hospitals

Recently published 2022 data indicates relatively restrained national healthcare spending as the COVID-19 pandemic faded, especially in the hospital sector.

The increase in spending on hospital services slowed from 4.5% in 2021 to 2.2% in 2022, CMS actuaries reported Dec. 13 in Health Affairs. The increase was significantly less than in 2020 (6.2%) and the pre-pandemic year of 2019 (6.3%).

For the healthcare industry overall, spending in 2022 rose by 4.1%, to $4.5 trillion, up from a 3.2% increase in 2021 but way down from 10.6% in 2020, when the Provider Relief Fund and other federal subsidy programs were launched to mitigate the impact of the pandemic. The 2022 increase was slightly lower than in the period spanning 2016-19, when the annual growth rate was 4.4%.

As a percentage of GDP, total healthcare spending fell to 17.3%, down from 19.5% and 18.2% in the two prior years.

For hospitals, the spending data reflect the revenue challenges they endured last year, when the sector-wide median margin was negative before inching into positive territory in December.

Hospital days (0.6%) and discharges (1.1%) declined from 2021, when utilization rebounded from the widespread deferral of care that was seen in 2020.

Those numbers indicate volume constraints that are affecting spending on hospital services. In an earlier 2023 report, CMS actuaries said the slow growth projected for hospital spending in 2022 was partially attributable to “labor supply issues in providing timely medical care.”

2022 payer trends

The rate of increase on hospital spending slowed significantly between 2021 and 2022 for commercial payers, Medicare and Medicaid.

The increase in commercial insurance spending on hospital care was 6.4%, down from 13.2% in 2021. The 2022 increase nonetheless exceeded the average 5.5% that was seen between 2016 and 2019.

Medicare spending in the hospital setting slowed from an 8.3% increase in 2021 to 1.2% in 2022, including an actual reduction in fee-for-service hospital spending. A factor in that decline was a 3% drop in enrollment, following a 3.8% fall-off in 2021, as more beneficiaries shifted to Medicare Advantage.

Inpatient utilization declined among Medicare patients in 2022, leading to a decrease in spending on inpatient services compared with 2021. A reduction in COVID-19 admissions had a significant impact on spending because those admissions included a 20% add-on payment during the public health emergency (PHE).

Utilization of hospital outpatient services “exhibited low growth,” the report states. The shift of procedures such as joint replacements to outpatient settings tempered overall Medicare spending.

In addition, after being frozen for most of 2020 and all of 2021, the Medicare payment sequester was restored at a rate of 1% during Q2 2022 and the full 2% for the second half of the year.

The earlier report by CMS actuaries projected Medicare spending on hospital care would increase by 11% in 2023, owing to higher utilization.

Medicaid spending in hospital settings decelerated from a 10.9% boost in 2021 to 6.9% in 2022. The number likely will be lower in 2023 with the end of PHE continuous-enrollment provisions.

Hospitals also saw a decrease in revenue from nonpatient sources, a category that dropped by 8.9% amid a tumultuous investment market.

Prices in the spotlight

Hospital prices rose by 2.8% in 2022, down from 3.2% in 2020 and 3.1% in 2021. The increase in each of the last three years was greater than in any year between 2011 and 2019. Yet price increases significantly trailed the jump in costs, as indicated by the sector’s Producer Price Index, which surged by nearly 18 points between the start of 2020 and the end of 2022.

Looking ahead to 2023 data, “Growth in utilization is expected to rebound, and hospital price growth is projected to accelerate partly because of rising labor costs,” according to the earlier report by CMS actuaries.

Such an increase was not necessarily seen, however, at least based on preliminary data for elective services. In a report on 2023 price changes for 500 shoppable services, Turquoise Health cited an increase of 2% through Q3.

For the decade spanning 2022 through 2031, CMS actuaries projected a 5.4% annual increase in healthcare spending. Hospital spending was expected to grow slightly more rapidly, at 5.8%, with prices increasing by 3.2% annually.

In a Health Affairs analysis on the new CMS report, healthcare economist David M. Cutler noted that spending on hospital services declined by 0.5% between 2019 and 2022.

Although the trend could partially stem from pandemic-related deaths, Cutler wrote, “It may also reflect an inability to raise prices in the short run, which made it hard for hospitals to employ a full staff. This again brings up the question of how hospitals adjusted to higher wages without materially higher prices.”