Paul Keckley: Inflation’s impact on healthcare: 5 takeaways
In March, inflation in the U.S. reached a 40-year high of 8.5%, year over year, according to the U.S. Labor Department. The Federal Reserve projects it will drop slightly over time, but economists remain uncertain because of the unpredictable impacts of the Russia-Ukraine conflict, the pandemic aftermath and sustained disruption of the supply chain.
Driven by higher gas and food prices, every category of household spending has been impacted. Economists project consumer prices will increase 3.0% to 4.5% in 2022, and they expect the Fed’s interest rate hikes will have nominal impact on lowering inflation.a Thus, household expenses are forecast to increase $433 per month this year — half due to increased energy and food costs.b
Inflation is top of mind for consumers, as evidenced by the various research findings cited in the sidebar on the next page. It also has a significant correlation to U.S. household spending for healthcare.
Impact on U.S. households
CMS forecasts healthcare spending will increase about 4.6% in 2022 to $4.5 trillion. In tandem, out-of-pocket costs hitting households are projected to climb 6.1% in 2022 and an average of 4.6% annually to 2030 at roughly the same rate as their wages.
But CMS’s forecast of 2022-30 national health expenditures is enlightening: The agency forecasts total healthcare spending will increase 50.2% from 2022 to 2030, but household out-of-pocket spending will increase only 41.4%. This forecast suggests growing affordability issues for consumers might be nearing a tipping point, putting more pressure on providers to cut costs. And that pressure will be even more intense if Medicare’s scheduled sequestration cuts (2% cuts in 2022 and 4% in 2023) are not delayed.
In contrast to recent price hikes for energy and food, healthcare appears in sync with the Fed’s targeted 2% inflation target, but to average households, that’s irrelevant. Spending increases for prescription drugs have drawn specific attention from industry critics, who cite the opaque pricing in these sectors as a major contributor to annual health spending increases expected to average 4.6% annually through 2030.
Areas of focus for finance executives
For healthcare finance professionals, healthcare inflation requires intensified efforts to address five concerns.
1 Increased bad debt. As many as 23 million in the United States have unpaid medical debt, and 16 million owe more than $1,000.c Days in receivable and bad debt will increase as consumers struggle with higher prices for discretionary purchases and delay/disregard healthcare bills (including premiums and copayments).
2 Increased operating costs. Should the industry continue to see a high compound annual growth rate (CAGR) for drugs and labor cost, as many expect, operating margins for health systems will likely decline, making it necessary for them to adopt more aggressive procurement policies.
3 Heightened public scrutiny of pricing policies and executive compensation. Congress will continue to focus attention on enforcement of federal pricing mandates (e.g., via the No Surprises Act and the Health Care PRICE Transparency Act) as it seeks to allay voter concerns about affordability and unintelligible pricing policies by the industry. Congress also can be expected to apply pressure and take at least modest action to address high drug prices.
4 Increased competition by privately funded competitors offering low-cost solutions. Insurtech and private-equity-backed niche solution providers will promote programs promising lower costs to consumers for insurance premiums that are likely to expose enrollees to higher out-of-pocket spending risk.d Finance leaders should closely monitor fundraising by healthcare-focused private equity funds and deployment of capital by healthcare’s strategic investors (e.g., Walmart and Amazon).
5 Growth of “Occupy Healthcare” movements. The public’s appetite for lower healthcare costs and price transparency coupled with the erosion of trust in the nation’s healthcare system will prompt activist movements against drug companies, hospitals, medical specialty groups and others.e
To address these five concerns, healthcare finance professionals must challenge operators to take swift action but focus on the following actions. The concerns are not new, but the risk from ineffective action is higher than it has been in 40 years:
- Reducing fixed, variable and other costs
- Engaging in creative workforce planning
- Deploying capital cautiously to ensure sustainability of the core business and funding for growth Pursuing risk-based contracting and price-setting with payers, where agreements are focused on achieving savings and performance improvements (value creation) above the strategic and operational risks for participation
- Pursuing smart scale, where the formula is bigger + more efficient, recognizing that both aspects are essential
That’s what inflation means for healthcare. And finance will be at the center of the industry’s response.
a. Sanchez, M., “Comerica economists lower expectations, forecast higher inflation rate in 2022,” MiBiz, Oct. 15, 2021.
b. Winck, B., “Americans should budget an extra $5,200 this year to cover rising prices, Bloomberg economists estimate,” Business Insider, March 29, 2022.
c. Rae, M., et al., “The burden of medical debt in the United States,” Peterson-KFF Health System Tracker, March 10, 2022
d. The term insurtech refers to companies that use technology to extract savings and efficiency from existing insurance models employed by the insurance industry.
e. McNickle, M., “6 things you need to know about Occupy Healthcare,” Healthcare IT News, Nov. 18, 2011.