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April 15, 2022

Inflation is booming. Why hasn't it hit health care?

Daily Briefing

    U.S. inflation hit a four-decade high in March, largely due to price increases in energy, food, and housing. And while health care prices have so far been mostly unaffected, experts say that could change soon.

    Apr. 28: How health plans can succeed in the individual market

    Health care prices remain mostly stable amid widespread inflation

    According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 8.5% in the 12 months ending in March. Even so, health care inflation has remained around its historical trend of about 2%, according to Corey Rhyan, a senior analyst for health economics and policy at Altarum.

    Experts say that, while the price of gas and food often change quickly in response to national and global economic conditions, health care is different, as payers and providers usually establish their payment rates well in advance.

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

    For instance, Medicare determines its payment rates using projections for the upcoming year, according to Matthew Fiedler, a fellow at the USC-Brookings Schaeffer Initiative for Health Policy. Its projections for 2022 were finalized in the first half of 2021, before general inflation accelerated significantly.

    Similarly, private insurers typically negotiate rates with hospitals and health care providers in advance, signing year-long contracts. As a result, patients don't usually see their premiums or out-of-pocket costs increase until those contracts end.

    Since rate-setters didn't anticipate inflation when they set prices for 2022, "it actually was kind of a self-fulfilling prophecy in the health care space" that inflation would remain low this year, said Marc Goldwein, SVP and senior policy director for the Committee for a Responsible Federal Budget.

    Health care prices could rise soon

    While health care prices haven't risen as quickly as other sectors, that could change soon, experts say.

    Goldstein warned that, as prices are established for next year, rate-setters will have to account for inflation. The economy's "other shoe hasn't dropped yet, because people probably are going to expect higher inflation for next year," he explained.

    Further, the health care industry is seeing supply costs rise due to supply chain disruptions. According to Kaufman Hall's National Hospital Flash Report, non-labor expenses per adjusted discharge increased almost 26% in February compared with the same month in 2020.

    Labor shortages are also hitting the industry hard. According to Kaufman Hall's report, labor expenses in hospitals rose 32% in February from the same month in 2020.

    And drug spending is rising too. According to a report from the American Society of Health-System Pharmacists, total drug spending in the United States grew 7.7% in 2021 compared with 2020.

    Consolidation could also help drive up prices, according to Jeff Levin-Scherz, an assistant professor at the Harvard T.H. Chan School of Public Health. Many weaker hospital systems and health care providers were absorbed by stronger systems during the pandemic, and larger systems typically have more negotiating leverage and higher reimbursement rates.

    Still, given the unique factors driving health care prices, experts aren't certain that inflation in the industry will increase 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." (Luhby, CNN, 4/12; Folley, The Hill, 4/13; Lagasse, Healthcare Finance News, 4/13; Levin-Scherz, The Hill, 4/2; Guilford, Wall Street Journal, 4/12)

    How health plans can succeed in the individual market

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