Brace yourself for the rise in health care bills amidst inflation

Soaring rent and food costs have company: Health care costs are soaring, and what’s more alarming, they’re likely to rise much more and could help keep comprehensive inflation elevated for some time, analysts state.

Inflation is anticipated to boost annual U.S. national health expenses by $370 billion by 2027, juxtaposed with pre-pandemic projections, consulting firm McKinsey’s report in September.

The medical care index, a subgroup of the consumer price index, accelerated to 0.7% in August from 0.4% in July. Over the past year, it was up 5.4%, the most consequential 12-month increase since 1993 but still below the widespread 8.3% pace of inflation. 

That lag in health care inflation to general consumer inflation could be an ominous sign for customers.  

“This is distinctive, as health prices historically outpace prices in the rest of the economy,” declared a team of analysts led by Emma Wager at the Peterson-Kaiser Health System Tracker in a report last month. “This may result in steeper premium increases in the coming years.”

Why is health care getting more pricey?  

More increased costs of supplies and labor are contributing to the proliferation.

Early in the pandemic, health care supply prices were sore amid supply disruptions and higher demand. McKinsey stated that between 2019 and 2022, pharmaceutical prices increased by 21% and supplies by 18%. Those prices are still higher than usual but are showing signs of stalling.  

Analysts say labor costs are still growing strongly and will outpace the general inflation rate.

“Labor’s very important because it has the potential to be persistent,” stated Shubham Singhal, global leader of McKinsey’s Healthcare, Social and Public Sector practice.  

He predicts wages will continue to rise as the health care labor shortage languishes while demand for services grows, partially due to an aging population.

Between 2019 and March 2022, a benchmark of hospital labor costs called the median labor expense per adjusted discharge rose 37% to $5,494 from $4,009, Kaufman Hall consulting firm expressed in a report in May.

Will health care premiums rise? 

Customers who buy their insurance could start seeing steep premium rises next year.

Across 72 insurers in 13 states and the District of Columbia in the Affordable Care Act (ACA) Marketplaces, the median suggested premium increase next year is 10%, higher than in recent years, early assessments by Peterson-Kaiser Health System Tracker show.

Health care costs are set at least a year ahead, creating a delay before wage enlargements and other expenses related to broader inflation are fully integrated into health care costs.

Providers who have dealt with skyrocketing costs in the past 18 months only recently are getting a possibility to renegotiate payments and pass on some added expenses to insurance companies or government commodities.

By 2024 all employers’ expenses “will be crushing in full force,” Singhal spoke. “Much of that will fall to consumers because employers have premium sharing” with workers.

“It’s a slow-moving train,” he declared, but it’s coming.  

How do medical care expenses affect inflation and Fed rate decisions? 

Since health care, like rent, typically doesn’t see regular price surges when its prices increase, economists consider this “sticky” or persistent inflation. They take an extended period to grow and a long time to decline.

Inflation could stay higher longer and lead to the Fed raising its short-term benchmark fed funds rate even higher to squash inflation. Most consumer rates follow the Fed’s higher benchmark, making borrowing more expensive and discouraging spending, and less spending means less demand, which cools inflation.

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How can the expense of health care be lowered?

Layoffs and rising productivity can cut costs, McKinsey declared.

More than 25% of executives in a McKinsey survey consider they may have to cut at least 10% of their workforce, especially nonclinical employees like personal care helpers, in the next six to 18 months.  

Executives (66%) also want to enhance productivity with technology, especially in processing paperwork. 

Longer-term, Singhal spoke, the industry can accelerate value-based care, which links payments to the quality of care provided. This contrasts with the prevailing fee-for-service reimbursement, which reimburses providers for services delivered founded on bill charges or annual fee schedules.

Another strategy would be dragging some hospital care to different sites. “Some surgeries can be done cheaper in an ambulatory surgery center rather of a hospital,” Singhal expressed. “Home care settings can also be the same or better quality at more subordinate costs.”