Inflation is falling, but health premiums and medical costs are rising

During the pandemic, health care costs — usually a key driver of U.S. inflation — have remained surprisingly stable, rising at only about 2% annually, even though the prices of many goods and services have risen at more than three or four times that rate.

However, there are signs that medical inflation is returning as demand for non-COVID-19 related healthcare services recovers and healthcare providers try to offset rising labor costs and losses during the pandemic.

The price of hospital services, the largest single component of medical care, accelerated to an annual rate of 5.5% in December and even faster in January, according to data on personal consumption spending, the Federal Reserve’s preferred measure of inflation.

“Unfortunately, it’s going to be a problem that’s quite persistent as it drains more and more money from consumers’ wallets,” said Sunit Patel, chief actuary for health and social services at consulting firm Mercer.

Consumption cost increases for nursing homes ran at a slightly higher rate of 5.7% last year; Dental services increased even faster.

Hospitals are pushing for higher payments as their long-term contracts with health insurers need to be renewed.

And greater market concentration, caused by chains buying up smaller hospitals, is helping to push medical inflation higher, as is the historically opaque nature of healthcare pricing.

“I’m very worried that we’re facing a big leap [health insurance] Bonuses and expenses,” said Glenn Melnick, USC’s health economics and finance specialist.

Until recently, health care bills weren’t really a problem for Rex Thomas, a retired US Postal Service maintenance mechanic who lives in Moreno Valley, California. They were nowhere near comparable to his escalating gas and grocery bills, including the 40% extra he pays to feed his two Siberian huskies.

But even as inflation has fallen on many things, he has noticed that his healthcare bills are moving in the opposite direction.

At open enrollment last fall, he learned that his union-sponsored premium for the Cigna health plan would cost him 4.8% more this year, after rising 3.6% in 2022. He switched to another plan.

He said Loma Linda University Medical Center, his hospital of choice, has been getting tougher on billing, requiring a $1,500 upfront payment for an upper endoscopy he requested.

“They locked it out of my reach,” Thomas said.

A hospital spokesman responded in a statement that the medical center was “committed to providing clear and transparent billing practices to our patients.” We strive to ensure our billing processes are simple and efficient, and that our patients understand their financial responsibilities.”

About half of the country’s population has employer-financed health insurance. In a tight labor market, many employers will be reluctant to pass the rising costs directly on to their employees, who typically pay part of the premium.

But at the same time, Melnick said, employers are likely to adjust other parts of workers’ compensation and offset higher healthcare costs with lower wage increases.

“This bonus is not free. It decreases your net compensation,” he said.

American households are already suffering from a loss of purchasing power because wage increases have not kept pace with inflation. And many consumers struggle with medical bills, which are the single largest contributor to debt collection and a factor in personal bankruptcies.

The recent surge in headline inflation came after decades of near-stagnant prices for most goods and services. Inflation, based on the CPI, rose to a 40-year high of 9.1% last June and has since eased to 6% in February. According to the Fed’s preferred measure, which covers a broader spectrum of spending, the most recent inflation rate was 5.4% – still well above the central bank’s target of 2%.

Although policymakers have raised interest rates to curb spending and investment to dampen price increases, the country’s inflation problem has now shifted from goods to services.

While prices for appliances, clothing and leisure gear have eased from previous price spikes thanks to an easing in demand and supply shortages, there has been little relief for consumers in services such as rentals, transportation, restaurants and personal care.

What makes the expected surge in medical inflation particularly worrying is that healthcare accounts for a large portion of people’s spending. And rising prices for services tend to fall more slowly than goods, meaning this could prolong the current cycle of hot inflation.

Healthcare spending accounts for almost a fifth of the country’s economy, and the medical services component has a similarly disproportionate impact on inflation, based on personal consumption spending data.

On the plus side, a few things could help dampen the trend of rising healthcare costs.

Telemedicine, for example, has received a big boost during the pandemic and could help drive down costs by reducing visits to doctor’s offices and providing other services remotely. The cost of medical services has remained stable over the past year.

Also, the proliferation of outpatient clinics and non-traditional health care facilities, including pharmacy chains, could exert some competitive pressure to keep prices down.

However, healthcare inflation tends to go hand in hand with labor costs. And the shortage of medical workers and the consequent increase in their wages in recent years may have only just been factored into general medical pricing, in part because providers are tied to long-term contracts with insurers.

Health insurers typically sign one- to three-year contracts with healthcare providers. The contracts are intended to secure lower prices for patients and predictable income for service providers.

Since COVID-19, hospitals have been struggling with higher turnover. Many more employees were retiring or quitting, burned out from the stresses of the pandemic and frustrated with management’s response to staffing needs. Many nurses left to work for significantly more money than traveling nurses.

Caroline Burris, who lives in Northeast Nebraska, started as a traveling nurse in 2019. When COVID-19 struck and demand for nurses increased, her pay more than tripled from $1,200 for a 36-hour week. It has since settled at around $2,200. “The pay was insane,” said the ER nurse.

Before the pandemic, spending on traveling nurses and other temporary workers accounted for 10% of the hospital’s total labor costs. Last year the figure was 33%, said Erik Swanson, senior vice president of data and analytics at Kaufman Hall, a leading research and consulting firm for hospitals.

Adventist Health, which operates 23 hospitals and numerous clinics, primarily in California, reported that personnel expenses increased 11% in the nine months ended September 30 compared to the same period last year. That’s a big reason the Roseville, Calif.-based company lost $254 million in those nine months.

“Demand for the healthcare workforce remains very strong,” said Matthew Notowidigdo, labor and health economist at the University of Chicago’s Booth School of Business. “That’s why I expect price increases – to hire these workers, you have to offer more.”

At the same time, overall hospital occupancy rates have not yet recovered to pre-pandemic levels, so revenue is not keeping pace with spending. And that has contributed to the ongoing consolidation in the healthcare industry.

Across the country, big hospital companies have been eating up smaller competitors and merging with other big chains. Medical groups have bought up medical practices, also in order to gain negotiating leeway with large health insurers.

Meanwhile, private equity investors have acquired more nursing homes and other senior facilities over the past decade. And studies have shown that these acquisitions have resulted in higher costs.

Although healthcare has lagged headline inflation since COVID-19, historical trends suggest it is bound to catch up, said Matthew Eisenberg, professor of health policy and management at Johns Hopkins University.

Consumers can respond to higher prices by opting for cheaper plans with high deductibles, where insurance only kicks in after the insured has paid a large amount out of pocket.

Eisenberg worries it will cause some people to forgo or delay receiving care, potentially leading to worse health and financial consequences for policyholders and the wider economy.

“That side has been pressured,” he said of shifting costs to consumers. “How much more juice can we get out of pressing?”

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