Bad medicine: Inflation hitting health care

Higher costs for medical care and health insurance may be the next burdensome inflation shoes to drop on the U.S. economy.

Upswings in health care costs would be another kick to inflation-weary consumers already battered by higher prices for groceries, energy and housing.

Health care increases could also extend beyond the present-day inflation wave with higher insurance premiums, drug costs and prolonged labor challenges.

The U.S. spends $4.1 trillion annually on health care between private insurance, government-run Medicare and Medicaid and other components of the medical sector, according to the federal government's National Health Expenditure report.

That far outpaces health care spending in other countries where universal coverage and government-run systems are more the norm.

Health care costs are projected to increase by as much as $370 billion in the U.S. by 2027 "due to the impact of inflation compared with pre-pandemic projections," according to an analysis by international consulting firm McKinsey & Co.

Labor shortages and their upward pressures on wages and compensation are big drivers of the increased costs, according to the McKinsey report.

Shortages for medical and other labor could propel health industry costs up as much as $260 billion in 2027.

The McKinsey study also found insurance companies were seeking premium increases of 10% on average and as much as 25% for 2023.

The latest Consumer Price Index for September shows health insurance prices are up 28.2% compared to a year ago, according to the U.S. Bureau of Labor Statistics.

Medical care prices are up 6.5% from September 2021.

The former larger figures stems from rises in annual premium prices, but health care related inflation is complicated by premiums and other prices that are often set on an annual basis.

"Those prices are locked in a year ahead of time," said Leslie Parker, president of Health Benefits 411, a medical insurance and consulting firm based in Gresham, Oregon, a suburb of Portland. "There's very little they can do with the cost of the services when they are locked into a contractor."

That can create more lags in price increases than other items such as groceries.

Parker said the current high-tide of inflation in the U.S. economy will be felt next year as well as in 2024.

She is also starting to see some higher health insurance premium prices in the Pacific Northwest marketplace.

"If I see any increases, it's around 7 to 10%," she said.

The 28.2% health insurance price hike figure in the September CPI stands with overall inflation at 8.2% and groceries up 13%. It is in the same company as other items with high inflation such as butter (up 26.6%), eggs (up 30.5%), air fares (up 42.9%) and fuel oil (up 58.1%).

Hospitals, medical practices, doctors and insurance companies, themselves, all have faced higher prices for equipment, supplies and other costs.

"It's likely we are starting to see that health care prices are picking up more," said Cynthia Cox, a vice president with Kaiser Family Foundation, pointing to upward price pressures related to labor and medical supplies and equipment.

Cox said the 28.2% CPI figure for health insurance reflects some of the past premium fluctuations and the previous year's marketplace because annual benefits programs were locked in and some of the impacts of the current inflation are not immediately reflected with the insurance inflation.

"It's definitely an eye-catching number," Cox said of the CPI figure.

Barometers up

Higher insurance premiums will be confronting employers and workers during annual enrollment periods next month, according to key barometers.

The Segal Health Plan Cost Trend Survey — which queries insurance and other health providers — expects health insurance costs to increase 7.4% next year.

Higher hospital and labor costs are expected to drive next year's health inflation, according to the Segal Group, a New York-based consulting firm.

"Shortages among nurses and the provider workforce have resulted in wage increases, as many health systems had to pay contract agencies or travelers who commanded higher rates to fill vacancies," according to Segal's 2023 forecast. "This ongoing wage pressure on hospital system operating costs, coupled with increased supply costs, naturally results in increases to the prices of services. It will take some time for the market to feel the full effect of these pressures due to the timing of providers re-contracting in commercial plans."

The Segal survey expects prescription drug costs to increase 9.8% next year after an 8.4% projected increase in the 2022 survey. Specialty drugs are expected to increase 13.5% next year, after a 13.4% jump this year.

The Inflation Reduction Act passed by Congress and President Joe Biden allows the federal Centers for Medicare and Medicaid to better negotiate lower drug prices and puts caps on annual costs and prices for insulin. The federal effort, which continues to face inflationary headwinds, does not extend drug price controls to the private marketplace.

Mercer Inc.'s National Survey of Employer-Sponsored Health Plans, another key industry metric, projects health benefits cost per employee to increase 5.6% on average next year, according to the Atlanta-based firm's survey of U.S. employers.

Financial services firm AON International expects a 6.5% jump in premiums for 2023 with per employee private health care expenditures increasing from $13,020 to $13,800 in 2023. The increases are double what AON"s survey showed from 2021 to 2022, according to the Advisory Board consulting firm.

Help wanted

Labor shortages — and their propelling of higher wages — are putting upward wage and price pressures on the health care sector. Those costs can get passed onto the customers, whether they be employers or patients.

The U.S. health insurance industry has recently reaped big profits with $19 billion in net earnings, with a 2.1% profit margin in 2021, and earnings of $31 billion and a 3.8% margin in 2020, according to the National Association of Insurance Commissioners.

The health care sector, like other industries, has been confronted by impactful labor shortages that are worsening after the pandemic.

There were more than 10 million open jobs in the U.S. economy in August — including more than 1.7 million in health care and social services, according to BLS.

McKinsey projects by 2025 the U.S. will have a shortage of between 200,000 and 450,000 nurses and 50,000 to 80,000 doctors. That accounts for as much as 20% of nursing workers and as much as 10% of physicians.

That will push up "clinical labor costs" up as much as 10% over the next two years, according to McKinsey. That translates into $170 billion increased costs by 2027. Other hospital labor needs will increase by $90 billion by 2027.

"I think labor is a huge issue," said Parker.

But she said employers will also have to think twice about how much of increased insurance premiums and other health costs they can pass onto workers with labor shortages and high turnover levels confronting much of the U.S. economy.

Parker said U.S. employers have long passed increased insurance costs to their employees. Now, that dynamic is changing, she said.

"I think what you see now is the employer having difficulties being able to do that for fear they will lose employees," Parker said.

Cox said hospitals and doctors offices have been challenged financially by some of the impacts of the pandemic — including the proliferation of traveling nurses who picked up hazard and other higher pay as COVID strained operational bandwidths.

"Nurses were able to make significantly more money if they were working as a travel nurse," Cox said.

For hospitals and other medical providers, the inflation wave and labor crunch comes after the unprecedented impacts of the pandemic.

"Hospitals have had to manage sudden and sharp increases in expenses on a wide range of items over the last several years. In the beginning of the pandemic it was acute shortages of desperately needed personal protective equipment (PPE) and other supplies and equipment. When COVID-19 hospitalizations spiked during repeated surges, it was the tremendous resources associated with treating very sick patients. More recently, expense growth has been driven by serious workforce pressures, overall economic inflation and increased patient acuity as a result of deferred care earlier in the pandemic." said Ben Teicher, spokesman for the American Hospital Association. "These latest challenges mean that 2022 is on track to be the most financially difficult for hospitals and health systems since the start of the pandemic."

Back to doctors offices, hospitals

Health care utilization during and after the heights of the coronavirus pandemic are also having continued impacts on medical premiums and other prices.

During the heights of fear and caseloads during the pandemic, many patients deferred or skipped doctors' visits, medical treatments and other care over concerns about contracting COVID as well as spreading to vulnerable family members and loved ones.

"Health care utilization just plummeted," said Cox, adding that turned into financial benefits for the insurance industry. "Insurers had set their premiums before the pandemic hit. Insurers were very profitable during the pandemic. They were very profitable."

Health insurance costs were down 9.4% in the September 2021 CPI compared to a year earlier. In September 2020, medical insurance prices were up 14.1% compared to 2019, according to BLS.

Now, with medical care utilization rising again, prices, costs for care and services are following suit.

That could put additional price pressures on eye and dental care, medical equipment and other health services.

The Federal Reserve Bank of Dallas expects health care services costs to increase next year and beyond, according to an analysis last month by economists Tyler Atkinson and Xiaoqing Zhou.

The regional arm of the U.S. central bank projects the prices of health care services to go from a 2.1% inflation rate in the second quarter of 2022 to a 3.9% rate in 2023 and a 3.5% inflation rate in 2024.

Those numbers are part of an inflation gauge from the U.S. Bureau of Economic Analysis which includes more services than the much-watched CPI.

Health care makes up 18.8% of the U.S. economy and health spending far outpaces levels in other countries, according to KFF.

Rising health care is also on the radar of inflation-fatigued small businesses, said Anthony Smith, Oregon director for the National Federation of Independent Business.

NFIB, which is economically and fiscally conservative, has 300,000 members nationwide.

Smith said small businesses and their workers are also on the frontline of 40-year highs with inflation, labor shortages across the economy and continued challenges with health insurance expenses.

"It's a triage situation," he said.