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Inflation-adjusted healthcare spending is falling for the first time in half a century

Press releases may be edited for formatting or style | August 01, 2022
The confluence of a slower rebound in health care expenditures alongside rapid economywide inflation has resulted in a surprising reversal in health care’s real spending growth over the past year. While it is a notable decline for now, many of the drivers of this trend are expected to be short-lived.

In the sixty-year period from 1960—the first year tracked in the official CMS National Health Expenditure Accounts—to 2020, growth in national health spending has always been positive and greater than economywide inflation, leading to a continual increase in real or “inflation-adjusted” US health spending.1 This has held true even in historical periods of very high US economic inflation, including the 1970s, meaning that health care’s overall cost burden has increased relative to consumer purchasing power and taken up a greater share of our nation’s GDP and household income.

Yet, for the first time in 2021, real health care spending growth was flat, and in the first quarter of 2022, real health care spending actually declined by 1.7% year over year (Figure 1). This is seven full percentage points lower than the long-term average (+5.3%). As a result, we have also seen health spending decline as a percentage of US GDP (falling from a peak of over 20% in mid-2020 to 18.0% in May 2022) as overall US economic growth has rebounded much faster than health spending in the post-2020 period.

Health care prices have grown much slower than inflation
This decline in real health care spending is driven largely by a decline in health care price growth relative to economywide inflation (though slower utilization growth has also had an impact). Figure 2 shows the faster growth in economywide inflation as measured by the overall consumer price index (CPI) and producer price index (PPI) and the otherwise moderate increases in health care prices as measured by Altarum’s composite Health Care Price Index (HCPI). Beginning in Q2 2021, measures of economywide inflation increased rapidly, initially driven by increased prices for commodities such as cars and computer chips, then followed by a more moderate increase in economywide services prices in late 2021 and 2022. Yet, over this time health care price growth has stayed at or even fallen below its long-term average growth. This slow growth in health care prices has been a major factor in keeping overall health care spending under control relative to other economic components, and as we’ve recently discussed, is likely a result of delays in the contract negotiations and government policies that set health care prices in advance for future years. As 2022 prices for health care and services begin to reflect higher negotiated rates for care, we expect the health care price index to accelerate from its current growth rate.

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