Plunge In Health-care Spending A Big Reason US Economy Sank In First Quarter

The coronavirus pandemic has put health care at the forefront of the nation's economic crisis, but it has also put a lot of economic activity from it on hold. Consumer spending on health care plunged 18% in the first three months of the year, making it one of the leading factors in the sharp drop in first-quarter economic growth, according to the Commerce Department's first-quarter GDP estimate. 

"That really gets to how this isn't just a numbers game about (the virus)," said Diane Swonk, chief economist at Grant Thornton. "There's collateral damage to the one sector that you would intuitively think would benefit most from a health crisis, and it's losing money and losing jobs ... because you displaced activity that was profitable." She called the drop-off the sharpest in recent memory.

State and federal officials ordered hospitals and physicians to curtail non-emergency care last month to focus on responding to coronavirus cases and to reduce the risk of patient infections in doctors' offices. Despite a surge in the use of telemedicine, the massive pullback in services late in the quarter hit the health-care sector hard, with hospitals, outpatient surgical centers and doctor's offices all reporting big losses and cutting jobs as revenues dried up.

"If the government had paid hospitals to do this, it would count toward GDP," University of Michigan professor Justin Wolfers observed in a tweet.  

Congress approved nearly $100 billion to aid hospitals and physicians in the CARES Act in March and another $75 billion in supplemental funding this month, but it came too late to save jobs in the health-care sector.

In March more than 42,000 health-care jobs were cut, the first decline since January 2014, which saw roughly 1,000 health-care job losses. Dentists' offices saw the biggest declines, with 17,000 job cuts, followed by 12,000 job losses at physicians' offices.

Some of the jobs and health-care spending are expected to bounce back, as more states are now beginning to allow elective procedures to resume. Still, health-care executives say the nature of the impact of the coronavirus on consumers makes it hard to predict how quickly some of that health-care activity will rebound.

"A number of our markets were beginning to reopen services, and our teams are doing that in a careful phased approach," said Wayne Smith, chairman and CEO of hospital operator Community Health Systems, on the company's first-quarter earnings call Wednesday. He added that some hospital surgeries may be pushed to the company's outpatient surgical centers to avoid patients having to go to hospitals.

"We're determining ways to reopen our capacity very efficiently," HCA Healthcare CEO Sam Hazen told analysts following the company's earnings last week, adding, "We're hopeful that the reboot process will be accomplished across all of our markets by the end of the second quarter, but that's still to be determined."

"With elective surgeries — with some of it there's a lot of demand destruction that's not coming back.  But there's going to be a big backlog later," said Joe Quinlan, chief market strategist at Bank of America private bank. He said overall health-care spending is set to rise because of the pandemic in the U.S. and overseas.

"If you're bullish on big pharma or technology related to health care, you're going to have a lot of that when it comes to government spending," Quinlan explained, adding, "China has realized their infrastructure for health-care services is not up to par."

But rising U.S. unemployment is one factor that could weigh on consumer health-care spending. Millions of Americans who lose their jobs may put off procedures they can no longer afford. Many could end up transitioning to individual health insurance coverage on the Affordable Care Act exchanges or the Medicaid safety net program — but that coverage tends to be less generous than employer health plans.

The shift in the delivery of care during the coronavirus pandemic to more telemedicine may also impact how consumers approach health care and could have implications for hiring in the health-care sector.

"The jobs in health care will come back, (but) I'm worried ... we may not see as much of a generator in these jobs going forward," said Swonk.