Health care inflation trails broader inflation, but not for long

Economy-wide inflation has outpaced health care inflation by a wide margin since last April, but Americans should expect health care prices to rise more soon.

The big picture: Companies can raise the prices of food, furniture and other commodities immediately. That’s not how it works in health care, where prices are set by government programs or negotiated with private insurers in advance and are reflected in economic data later.

The state of play: Consumer prices are increasing faster than at any other point in the past 40 years.

• Health care inflation, meanwhile, has hovered between 2–3% since the pandemic started.
• More, cheap generic drugs have kept medical inflation in check, whereas hospital and doctor services have driven a majority of the higher prices.
• Health care inflation trended higher than general inflation in 2020 due to things like federal subsidies and higher Medicare payments for COVID hospitalizations.

Between the lines: The things that are driving current inflation — labor shortages, supply chain problems and a golden opportunity for companies to boost profits — also exist in health care.

• That’s especially true for labor, as workers are burned out and calling in sick. Hospitals and other providers consequently have had to pay higher base wages and higher rates for travel nurses and other temporary staff.

What to watch: Medicare will release initial payment rates for 2023 in the spring and summer, and more importantly, some hospitals are signaling they will add higher costs and wages during their next round of negotiations with insurers.

• “To be candid, that would not surprise me at all,” Jennifer Mitzner, CFO of Baylor Scott & White Health in Texas, said at this year’s JPMorgan Healthcare Conference when asked about inflation in rate negotiations. “I would imagine that’s a conversation that’s happening nationally.”
• These provider price hikes, along with the expectation that people will continue to get more care that was deferred during the pandemic, will likely lead to insurers raising premiums for 2023.

Yes, but: Don’t expect future health care inflation rates to approach today’s current rates, independent health care analyst Paul Hughes-Cromwick said.

• The labor shortages are real, but hospitals and other providers also are under pressure to keep their already high costs under control.

Worth reminding: “There’s a difference between price growth and price levels,” said Corey Rhyan, a health economics analyst at nonprofit think tank Altarum.

• Relatively lower inflation now or in the future does not mean health care prices “are necessarily low or reasonable,” he said.