By Cynthia Cox Twitter, Robin Rudowitz, Tricia Neuman, Juliette Cubanski, and Matthew Rae Twitter KFF Briefs Posted: April 15, 2020
As the
coronavirus spreads rapidly across the United States, private health insurers
and government health programs could potentially face higher health care costs.
However, the extent to which costs grow, and how the burden is distributed
across payers, programs, individuals, and geography are still very much
unknown. This brief lays out a framework for understanding changes in health
costs arising from the coronavirus pandemic, including the factors driving
health costs upward and downward. We also highlight some special considerations
for private insurers, Medicare, and Medicaid programs.
Coronavirus testing and treatment costs
The most direct impact the coronavirus pandemic will have on
U.S. health care spending is through testing and treatment of COVID-19, but the
extent of upward pressure on health costs depends on a number of still unknown
factors.
One of the most important and yet still unknown factors driving
health care costs is the number and severity of COVID-19 cases in the U.S.
Projections vary, and are largely dependent on the success of public health
efforts to contain or mitigate the spread of the virus. The University of
Washington Institute for Health Metrics and Evaluation (IHME) model suggests the outbreak is reaching its peak
in the U.S., but others have warned of the possibility of another spike in
cases if social distancing measures are relaxed too soon this summer, or
possibly another outbreak this fall or winter. Particularly for
private insurers and Medicaid programs, the geographic distribution of
infections across states will also have important consequences for premiums and
state budgets, discussed in more detail below.
Currently treatment is supportive, not curative. Some COVID-19
patients are enrolled in clinical trials to test the effectiveness of certain
antiviral drugs, and human trials have begun to test the effectiveness of
vaccines. If an effective treatment is identified soon, this could
significantly reduce the strain of coronavirus on the health system, but the
costs of any new drug treatments could add new costs to the system, affecting
both public programs and private payers. Vaccines are not expected to be
available for at least a year. While vaccines will prevent future cases and thus
future spending, the vaccine will come at a cost as well.
Roughly 15% of people infected by the coronavirus could
require hospitalization, and a small share require invasive
mechanical ventilation. The cost of these admissions will vary by severity and
payer. In an earlier analysis, we estimate that, among people insured
through a large employer’s private health plan, hospitalization for pneumonia
ranged from an average of $9,763 to $20,292 in 2018 depending on severity and
comorbidities associated with the condition. However, patients who need to be put
on a ventilator would have much higher costs. In 2018, ventilation treatment
for respiratory conditions ranged from $34,223 to $88,114 depending on the
length of time ventilation is required, for patients in large employer plans.
Treatment costs on a per patient basis for comparable admissions will be lower
in Medicare and Medicaid, where providers are reimbursed at lower rates. For
example, average hospital payments for pneumonia with major comorbidities or
complications are $10,010 under Medicare, and hospitalizations for respiratory
system infections requiring ventilator support are $40,218. Under the CARES
Act, Medicare will pay a 20% premium for COVID-19 treatment, but per admission
payment is still less than that for the same type of admission for people with
private plans, on average.
Many hospitalizations for COVID-19 treatment will cost around
$20,000 but treatment of the most severe cases would cost much more
Testing will likely involve relatively low costs on a per-test
basis. Medicare, for example, pays $36 to $51 for each test. As testing becomes
more widespread, though, the total cost will add up significantly. Hospitals
and labs are now required to post the cost of coronavirus tests, and insurers,
Medicare, and Medicaid are required to cover the tests without cost-sharing to
the patient.
Covered California published the first national estimates of COVID-19 treatment and testing costs,
ranging from $34 to $251 billion for commercial insurers (not including people
enrolled in Medicare Advantage or Medicaid Managed Care Plans). America’s
Health Insurance Plans (AHIP) in consultation with Wakely, recently produced
baseline estimates (assuming a 20% infection rate) of $84
to $139 billion in 2020 and $28 to $46 billion in 2021 for the direct cost of
coronavirus testing and treatment of COVID-19, by private insurers (including
commercial insurers, Medicaid MCOs and Medicare Advantage plans). However, using
different assumptions of infection rates would yield widely different costs,
ranging from a total of $56 to $556 billion over the two-year time period. The
AHIP estimates do not include spending on Medicare beneficiaries in traditional
Medicare. In a FAIR Health analysis of private, Medicare and
Medicaid claims, estimates of total COVID-19 treatment costs ranged from $139
billion to $558 billion. The range of these estimates is indicative of the
uncertainty around how many people will become infected and how many will need
hospitalization.
Delayed or foregone care may offset some
costs, but also cause pent-up demand
An indirect effect of the coronavirus outbreak is the additional
strain on limited hospital resources, which will lead to some care being
delayed or forgone. Additionally, due to both social distancing measures and
the economic downturn, individuals may also forgo outpatient care or
prescription drugs they would have otherwise used. Forgone care could offset
some of the additional costs of treating people with COVID-19, though the
degree costs are offset is still a question.
The IHME model suggests the number of people needing
hospitalization could exceed the number of available hospital beds for some
time to come in parts of the country. Hospitals in the U.S. are canceling or
delaying some elective procedures to leave more beds, equipment, and staffing
available for treating patients with COVID-19.
Elective care generally refers to any care that is not urgent,
but many so-called elective procedures are nonetheless lifesaving or can
significantly improve quality of life. Hospitals in the U.S. appear to be
making different decisions about whether and which care to delay, making it
difficult to model the cost effects. The Centers for Medicare & Medicaid
Services (CMS), have release broad guidelines recommending procedures to be
delayed. Additionally, some other types of hospitalizations may be avoided or
delayed beyond just surgical procedures.
To understand the potential impact of delayed and forgone care
and considerations insurers face in setting premiums for next year, we analyzed
claims data from non-elderly enrollees of large employer plans using a sample
of the IBM MarketScan Commercial Claims and Encounters Database. In 2018, 37%
of hospital admission spending by large employer plans was on surgical
procedures that did not originate in the emergency room, some of which may be
delayed or forgone. Some of the surgical admissions that do not originate in
the emergency room are nonetheless time-sensitive and life-saving. As hospitals
across the U.S. are making differing decisions about which procedures to go
forward with, often on a case-by-case basis, it is not yet possible to say how
much of this or other hospital spending will be canceled or deferred into next
year, but it gives a sense of the uncertainty and assumptions insurers may make
in setting premiums for next year.
Elective procedures represent a substantial share of spending on
hospitals
Although most forgone care is likely to put downward pressure on
health costs this year, at least for several months, the delayed procedures and
costs could shift to the next calendar year, raising spending for 2021. There
is additionally some concern that certain types of delayed care could worsen
health outcomes and cause higher spending later. For example, delaying or
forgoing chronic disease management, either because of reduced access to
medical providers or pharmacy services, could lead to more complications later.
Special considerations for private
insurance and enrollees
Private insurers face particular challenges in predicting their
costs, as there are still many unknowns around policymaking relating to
cost-sharing requirements and risk mitigation programs. As the AHIP estimates
demonstrate, the range of possible costs could vary ten-fold depending on the
severity of the outbreak, not to mention additional unknowns such as the number
and types of elective procedure delays, amount of pent-up demand, and
uncertainty over policy changes.
Commercial insurers must submit premiums for 2021 to state
regulators for review and approval in the next two months. In their premium
calculations, insurers are not allowed to justify future premium increases
based on any losses they expect this year. Instead, premium justifications must
be based on assumptions about claims costs for next calendar year. If claims
costs are exceptionally high this year, though, insurers might need to
replenish surplus in order to remain solvent. Once finalized, in late summer,
premiums will be locked in and insurers will be unable to change those rates
for the duration of the coming calendar year.
The consequences of guessing wrong could be dire for some
insurers. Insurers may have an incentive to over-price their plans,
particularly on the individual market where many enrollees are subsidized and
sheltered from premium increases. State regulators could encourage insurers to
make similar assumptions about COVID-19 costs and pent-up demand so that
premiums are not radically different from each other simply based on differing
assumptions. However, the uncertainty around premium setting could also lead
some insurers to decide not to offer coverage next year. In past years, when
there was uncertainty around premium setting, some parts of the country were at
risk of having no insurer offering exchange coverage.
Congress has not passed a risk mitigation program for private
insurers in light of COVID-19. However, the Affordable Care Act (ACA) included
two temporary market stabilization programs in its early years
that could serve as models. Reinsurance would protect insurers against losses
from extremely high-cost enrollees and a risk corridors program would protect
against extreme gains or losses from inaccurate premium setting.
Reinsurance works by reimbursing insurers for a portion of
claims cost for each enrollee that exceeds a certain threshold. If an
enrollee’s costs exceed a certain threshold, called an attachment point, the
plan is eligible for payment up to the reinsurance cap. Under the ACA,
attachment points were set at $45,000 in the initial years of the program. As
the program is intended to reimburse for extremely high cost individuals, and
many COVID-19 patients will have hospitalizations that cost in the $20,000
range, reinsurance as designed under the ACA would have missed many of these
enrollees and would likely only reimburse for those COVID-19 patients requiring
intensive care or ventilation. The program could be altered to include
condition-based reimbursement, but it would not address mispricing due to
incorrect assumptions about non-COVID care like elective procedures being
delayed or forgone.
A risk corridors program would more directly address concerns of
mispricing, including inaccurate assumptions about delayed elective procedures
and pent-up demand beyond COVID-19 treatment, by limiting losses and gains
beyond an allowable range. The federal government would share in the gains and
losses of private insurers that set premiums too high or too low. Under the
ACA’s risk corridors program, insurers whose claims costs were lower than
expected by more than 3% paid into the program, and those whose claims costs
were higher than expected by more than 3% received funds from the program. If
an insurer’s claims fell within plus or minus three percent of their target
amount, the plan made no payments into the risk corridor program and received
no payments from it. In other words, insurers would still experience some gains
and losses, but both would be limited.
For private insurance enrollees, out-of-pocket costs remain a
concern. Some insurers have voluntarily waived cost-sharing for COVID-19 treatment, and a
mandate has been proposed though not passed at the federal level. For those
whose costs are not waived, we have estimated that out-of-pocket costs for a COVID-19
hospitalization could exceed $1,300 for people who are insured by a large
employer. Out-of-pocket costs would likely be higher for people covered by
small businesses and individual market plans, as those plans tend to have
higher deductibles.
Special considerations for Medicare
program and enrollees
Older adults are at particularly high risk for COVID-19
complications and death, and virtually all adults ages 65 and older are covered
by the Medicare program. While it is possible that Medicare spending will
increase above projected baseline spending for 2020, the magnitude of that
increase, and the longer-term impact, is not clear. Increases in Medicare
spending would have spillover effects for Medicare beneficiaries’ out-of-pocket
spending in future years, in the form of higher premiums, deductibles and other
cost-sharing requirements.
The pandemic is likely to put upward pressure on Medicare
spending due to the following factors: the number of Medicare-covered COVID-19
hospitalizations; how much Medicare pays to treat COVID-19 patients, taking
into account the share of hospitalized patients requiring ventilator support,
and the 20 percent increase in Medicare payments for COVID-19 patients; the
share of COVID-19 patients requiring post-acute SNF or home health care, and
the intensity of services they receive; the cost of medications used to manage
patients outside the hospital setting; the cost of a vaccine, when it becomes available;
and the number of beneficiaries who are tested for the coronavirus.
However, just like in private insurance and Medicaid coverage,
increases in Medicare spending may be partially offset by delayed or forgone
procedures and office visits. A reduction in spending due to postponement of
such procedures would offset the increase in Medicare spending for COVID-19
patients, at least in the short term. It is not yet known what share of these
procedures will be rescheduled for later this year or shifted into 2021, or
whether the delay in care will lead to costly adverse health events down the
road.
It is also not known the degree to which expanded telehealth
services will impact Medicare spending. Prior to the outbreak, Medicare
payments for telehealth were extremely limited under the traditional Medicare
program. Based on new waiver authority included in the Coronavirus Preparedness and Response Supplemental Appropriations
Act (and as amended by the CARES Act) the HHS Secretary has waived certain restrictions on Medicare coverage of telehealth
services for traditional Medicare beneficiaries during
the coronavirus public health emergency. This change could
offset a decline in the number of in-person office visits and the associated
Medicare spending that would otherwise occur.
Capitated payments by the federal government to Medicare
Advantage plans, which currently provide coverage to more than one third of the
total Medicare population, may not be materially affected by the coronavirus in
2020 (though the underlying costs to those plans certainly could). Beginning in
2021, Medicare payments to Medicare Advantage plans could rise faster than
expected based on the experience of plans this year and expectations for
expenditures next year, or if benchmarks rise due to higher traditional Medicare
spending; if average spending for traditional Medicare beneficiaries rises due
to COVID-19, then payments would be likely to rise for Medicare Advantage
plans, as well, with considerably variation across counties, across the
country.
For Medicare beneficiaries, the impact of COVID-19 on
out-of-pocket spending in the short term will depend on whether they are
infected and whether they require hospitalization for treatment. Although
beneficiaries will face no out-of-pocket costs for testing or testing-related
services, many would face exposure to costs for treatment, unless they have
supplemental coverage that will pay some or all of these costs, or are enrolled
in a Medicare Advantage plan that is waiving cost sharing for treatment. For
patients who do not have COVID-19, they may face a drop in spending if they
delay health care services they might otherwise have received, such as elective
procedures or office visits. Over the longer term, beneficiaries could face an
increase in out-of-pocket costs for Medicare premiums and deductibles if
Medicare spending for 2020 increases due to COVID-19 (beyond what it otherwise
would have).
Special considerations for Medicaid
programs and enrollees
Medicaid program costs are expected to increase as a result of
dealing with COVID-19 because of the cost of treating currently enrolled
patients with COVID-19 and because overall enrollment is expected to rise as
unemployment increases and people lose their job-based coverage.
As a countercyclical program, Medicaid enrollment increases
during economic downturns when people lose jobs and income and qualify for
coverage. Increased demand and enrollment results in increased spending. As a
condition to access a temporary increase in the Medicaid match rate, states
must comply with maintenance of eligibility requirements and cannot restrict
eligibility or make it more difficult to apply for Medicaid and states must
also provide continuous eligibility through the emergency period. Increased
enrollment and potentially higher costs tied testing and treatment of COVID-19
will put upward pressure on Medicaid costs.
Even aside from enrollment increases, COVID-19 could result in
higher costs to Medicaid programs than anticipated, as in private insurance and
Medicare. Most Medicaid enrollees are served through capitated managed care
plans, so new unanticipated costs could be incurred by private insurers. States
could have options to negotiate rate adjustments, provide additional “kick”
payments for COVID-19 related costs, implement carve-outs of COVID-19 related
care, establish risk corridors or make retroactive adjustments to address
higher than anticipated costs. Recent CMS guidance speaks specifically about
such adjustments for COVID-19 testing and for the telehealth services.
Similar to other payers, Medicaid programs may see some declines
in utilization of non-urgent care; however, unlike other payers, a larger share
of Medicaid spending may continue. The majority of Medicaid spending is for the
low-income elderly and people with disabilities, which includes spending for
long-term services and supports. These services provided in institutional or
community based settings are ongoing and necessary to assist with activities of
daily living and cannot be easily deferred.
Strategies typically employed to reduce costs in response to
economic conditions may not be viable. In past recessions, states have tried to
manage costs by freezing or cutting provider rates or implementing targeted
benefit restrictions. However, as many providers are strained by the
coronavirus response, provider rate cuts may not be feasible and targeted
benefit cuts are unlikely to amount to significant reductions in spending
(especially because spending on some optional services, like dental care, are
generally small and may be naturally lower if individuals are not accessing
those services due to the pandemic).
Medicaid may also be used as a vehicle to support providers as a
result of COVID-19. An array of options may be available to help provide
funding quickly to providers through Medicaid. For example, states can make
advance, interim payments to providers based on historic claims. States can
also pay higher rates for home and community based services during the
emergency.
Discussion
The costs of coronavirus testing and COVID-19 treatment are
expected to be high, reaching tens if not hundreds of billions of dollars, but
there is extreme variation in estimates due to remaining uncertainty about the
extent of the outbreak. Additionally, other care, such as for elective procedures
and some outpatient care or pharmacy use, is likely to be forgone as hospitals
take measures to free up capacity for COVID-19 patients and individuals put off
care due to less access under social distancing orders or concerns over
contracting the virus. On net, health spending could be higher this year and
next than otherwise expected before the pandemic hit, but it is yet to be seen
how upward and downward cost pressures will balance out.
Private insurer earnings calls and quarterly cost data will
provide some clues into how net spending has changed, but insurers will soon
need to make decisions about participation and premiums for 2021 with very
limited information. The implications of inaccurate assumptions could include
higher premiums, steep increases in future years, and insurers exiting the
market.
Federal Medicare spending could increase more than it otherwise
would due to COVID-19, but the magnitude of that increase is an open question.
As is the case with private insurance, the increase in spending for COVID-19
hospitalizations over a period of several months in 2020 will be partially
offset by the decrease in spending for non-urgent surgeries, procedures and
other medical services. COVID-19 could lead to an increase in payments to
Medicare Advantage plans in 2021, depending on the experience of plans in 2020,
and whether higher spending on COVID-19 treatment is offset by reduced spending
on non-urgent procedures. An increase in Medicare spending would have spillover
effects for beneficiaries’ premiums, deductibles and cost-sharing, and come at
a time when Medicare already faces long-term financing challenges.
Medicaid programs will experience increased spending from both
the treatment of COVID-19 and increased enrollment as unemployment increases
and people lose their job-based coverage. Some of the cost-cutting mechanisms
Medicaid programs employed under past recessions may not be an option in the
midst of the coronavirus pandemic.
Methods
We analyzed a sample of medical claims obtained from the 2018
IBM Health Analytics MarketScan Commercial Claims and Encounters Database,
which contains claims information provided by large employer plans. We only
included claims for people under the age of 65, as people over the age of 65
are typically on Medicare. This analysis used claims for almost 18 million
people representing about 22% of the 82 million people in the large group
market in 2018. Weights were applied to match counts in the Current Population
Survey for enrollees at firms of a thousand or more workers by sex, age and
state. Weights were trimmed at eight times the interquartile range.
Admissions were classified as pneumonia when the associated
diagnosis-related group (DRG) was 193, “Simple Pneumonia and Pleurisy with
major complications,” 194 with “complication or comorbidity” or 195 “without
complication.” Admissions were classified as a respiratory system diagnosis
with ventilator support required for 96 hours or more when the associated DRG
was 207, and a respiratory system diagnosis with ventilator support required
for less than 96 hours when the associated DRG was 208. Total cost was trimmed
for admissions below the 1st percentile and above the 99.5th percentile within
DRG.
We defined the type of admissions based on the classifications provided
in the Marketscan database, similar to the approach used here, which classifies
admissions into five categories: surgical; medical; childbirth and newborn;
psychological and substance abuse; and, other. We defined an emergency
admission as an admission that included at least one claim in the emergency
room (as defined by “stdplac”).
The authors would like to thank Dustin Cotliar, MD, MPH for his
contributions.
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