CPA INSIDER

How COVID-19 could affect health spending

Understanding health care cost projections can help CPA financial planners advise clients on how to plan for the future.
By Taylor Knopf

Americans can expect overall health care costs to rise over the next decade, with a few potential lulls and spikes as the COVID-19 pandemic upends the health care system.

The latest national health spending projections, which include private health insurance payers and public options such as Medicare and Medicaid, show a larger average per-year increase (5.4%) over the next decade than the United States has seen in the recent past. This follows several years of lower rates of health care cost inflation (1.2%) between 2014 and 2018, according to a Health Affairs report based on numbers released by the Centers for Medicare & Medicaid Services (CMS).

Meanwhile, health care prices for individuals are expected to go up at a rate of 2.4% on average per year from 2019 to 2028.

Being aware of these national trends can help financial professionals assist their individual and business clients prepare for future health spending needs.

The projected increase in health spending is driven by an expected rebound in the prices for medical services and goods, CMS economists wrote in the Health Affairs report. These projections and analysis were released in late March, just as the coronavirus descended on the United States and people began sheltering in their homes.

Medicare, the federal health insurance program for Americans age 65 and older, will bear the brunt of the increase as more Baby Boomers enter the program. CMS economists project Medicare's average annual spending growth rate to increase by 7.6% through 2028, exceeding that of Medicaid (5.8%) and private health insurance (4.9%) over the projection period.

Potential COVID-19 effects

While the pandemic has disrupted health spending patterns in 2020, Ben Isgur, head of PwC's Health Research Institute, said he doesn't believe COVID-19 will significantly alter national health spending projections a decade down the road. However, this life-altering event continues to present many unknowns, and it's difficult to truly predict the impact, he said.

In the very immediate future, Isgur said some health care spending may be lower than usual, particularly for the employer insurance market, as people delay care. However, Medicare could be an exception, as the virus has hit older populations much harder.

"Elective and nonemergency surgeries are all being delayed to make room for COVID-19 patients," Isgur said.

The AICPA's Personal Financial Planning section recently produced a podcast about how Medicare benefits have changed during the COVID-19 pandemic.

In the short to medium term, Isgur expects that parts of the health care system will be short on cash, such as dental practices that suspended all routine cleanings amid stay-at-home orders, he said.

While some health care services were paused or experienced slowdowns early in the pandemic, there has been increased demand for and spending on mental health services. Experts expect that the elevated demand for mental health resources will continue as people navigate the stress, anxiety, and loss associated with COVID-19.

In contrast to the initial lull in some areas of health spending in early 2020, there could be an uptick in coronavirus-related costs to come. Isgur gave the example of a bad flu season early in 2018 that significantly increased health spending costs for employers. But he cautioned it's difficult to compare a global pandemic to one flu season.

"I don't think anyone can give a real number right now," he said. "As we start to see these COVID cases and bills come through the system, there will be a better picture of cost spending."

The large-scale, long-term outlook

It's possible that the pandemic will fundamentally change health care delivery, which could impact the overall cost of care.

Advancements in telehealth policies and reimbursements leaped years forward in a matter of weeks out of necessity as states implemented shelter-in-place orders to prevent spread of the virus.

Reimbursement parity from private and federal payers has been a barrier to more health care providers offering telehealth options for their patients. But federal rules and restrictions were waived amid the pandemic, and those virtual visits are being reimbursed.

"Could a large portion of primary care, chronic disease management, and specialty care be delivered over a digital platform, which will likely be less expensive, especially if it substitutes in-person visits?" Isgur speculated.

After previous disasters and health threats — such as the 9/11 attacks or Ebola — the United States has historically invested more money in emergency and public health preparedness. But such actions usually involve short-term spikes in funding, which soon wanes. This health crisis might be different, Isgur said.

"I do think we're going to have a little bit longer of an attention span after this one than we have in the past," he said.

Taylor Knopf is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a JofA associate director, at Chris.Baysden@aicpa-cima.com.


4 strategies to prepare for health spending increases

Gina Chironis, CPA/PFS, president of California-based Clarity Wealth Management Inc., shared tips on how she helps her clients prepare for future increases in health spending or manage an unexpected health care expense.

  • Encourage clients to contribute to a health savings account if they can. "It's the most tax-advantaged way to save for future health care spending," she said. "If at all possible, we recommend investing the money rather than using it for current health care expenses." Chironis said there's a common misconception that HSA funds must be used immediately, but she advises clients to save that money so there's a significant sum available when it's really needed.
  • Clients who cannot afford to finance long-term care services — which can be expensive — should consider purchasing long-term care insurance. Chironis encourages clients to explore these options between the ages of 55 and 60, when they can get the best rates.
  • Clients on Medicare with limited budgets might consider participating in Medicare Advantage (Part C) to help with out-of-pocket expenses. Chironis said it's important that clients understand the different options within Medicare and select the one that best fits their needs.
  • As a last resort, retired clients with limited options can take out a reverse mortgage line of credit on their home to acquire the funds to cover their health care expenses. People don't always view their home as an available asset, but Chironis said this may be a good option for someone under the right circumstances.

These are just a few ways trusted financial advisers can help clients manage their health spending now and prepare for future expenses.

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