Prices are soaring — but not for health care

By Tami Luhby, CNN

Gas prices have skyrocketed. Groceries and cars are more expensive. Housing costs are up.

But health care charges? Not so much.

While consumer prices are rising faster than they have in more than 40 years, health care inflation has remained rather muted.

The Consumer Price Index rose 8.5% in the 12 months that ended in March, propelled mainly by increases in energy, food and housing, according to the Bureau of Labor Statistics.

By contrast, health care inflation has generally hovered around its historical trend of around 2%, said Corey Rhyan, senior analyst for health economics and policy at Altarum, a nonprofit research and consulting group.

Medicare care commodities and services indexes in the CPI rose 2.7% and 2.9%, respectively, for the year ending in March — the lowest of any items.

Other federal measures of inflation show a similar split.

Health care inflation actually outpaced general inflation at the start of the pandemic, in part because of congressional Covid-19 relief measures that increased Medicare payments and Medicaid matching funds to states and because overall prices fell.

But economy-wide inflation took off in 2021 as rising demand and supply chain constraints drove up prices. And Russia’s invasion of Ukraine is pushing energy and food costs — and overall inflation — even higher this year.

Why health care inflation remains tame

While the cost of gas and food that consumers pay can adjust quickly to national and global economic forces, health care operates differently — payment rates are typically set in advance and last a year.

“There’s just not a lot of flexibility for those prices to change in the near term,” Rhyan said.

Medicare, which has a big influence on health care prices, determines its annual payment rates using projections of inflation for the year ahead, said Matthew Fiedler, a fellow at the USC-Brookings Schaeffer Initiative for Health Policy. The 2022 projections were finalized in the first half of 2021, before general inflation really took off. Also, many forecasters at the time felt the price increases would be temporary.

Private insurers also negotiate rates with doctors, hospitals and other providers in advance and sign contracts that typically set reimbursements in place for a year.

So patients generally don’t see increases in their premiums or out-of-pocket costs for the duration of the contracts.

“For most people, health care prices are not rising at an unusually fast rate right now,” Fiedler said. “It is possible if inflation remains high that that will change.”

Pressure building

The health care sector is not immune from the cost pressures affecting the US. Supply chain disruptions and labor shortages that have bedeviled the nation are also plaguing health care providers — and that could lead to higher health care inflation next year.

Compensation in the nursing home industry rose 5.7% in the 12 months ending in December, more than any other industry, according to the most recent Bureau of Labor Statistics data. At hospitals, compensation jumped 4.3%, while for workers overall, it increased 4%.

Hospitals are likely facing a structural reset in their cost of labor, not a temporary bump, said Eric Jordahl, managing director at Kaufman Hall, a health care consulting firm. They are hiring more nurses from agencies, which are commanding higher wages, and contending with shortages of less-skilled workers, such as those who feed patients and clean rooms. And like many employers, they must raise their pay to attract staff and to prevent them from leaving for higher-paying jobs elsewhere.

Labor typically accounts for a little more than half of a hospital’s total expenses.

Hospitals’ labor expense per adjusted discharge in February rose 32% from the same month in 2020, according to the most recent Kaufman Hall National Hospital Flash Report.

Meanwhile, hospitals are paying more for supplies too. Non-labor expense per adjusted discharge rose nearly 26% compared with February 2020.

“The pressure on the expense side is there,” Jordahl said. “It’s real.”

How much of these increased costs hospitals and other providers will be able to pass along to health insurers and patients remains to be seen. But pricing pressure is sure to be part of the contract negotiations for 2023, Jordahl said.

Since pricing in health care is not that straightforward, experts aren’t certain that inflation in the industry will pick up next year.

“In other economic sectors, I’d be confident it would ultimately change if overall inflation stayed high,” Fiedler said. “There are some peculiarities in how prices get set in the health care sector that means that’s not guaranteed to be the case.”

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