Health care costs may lag overall inflation, but that's about to change
“Medicare and Medicaid are setting prices based on what they predict inflationary and cost pressures are going to be,” says Corey Rhyan, senior analyst of health economics and policy for Altarum.
This year has been marked by record levels of inflation in many sectors of the economy, but not in health care – yet.
“Health care prices tend to rise faster when the economy is in a downturn or recessionary period,” says Corey Rhyan, senior analyst of health economics and policy for Altarum. “Prices jumped early in the pandemic, primarily due to an increase in public prices, with Medicare and Medicaid temporarily bumping up reimbursement for particular services in particular settings to help compensate for the pandemic. As the initial COVID-19 recession period waned, we saw those public prices come back down and private prices come up a little bit.
“Then beginning in the summer of 2021, we saw this period of rapid economy-wide inflation driven by a variety of factors, including increased labor costs across the entire economy and supply chain disruptions, but health care prices have yet to follow suit.”
Rhyan and other industry leaders shared their insights during The Health Wonk Shop: Health Care Inflation in the U.S., an Aug. 24 webinar presented by KFF.
Prices for medical services generally are set in advance — often tied to the calendar year — creating a delay between wage and cost increases caused by inflation and prices for medical services.
“Medicare and Medicaid are setting prices based on what they predict inflationary and cost pressures are going to be,” he says. “They predicted for 2021 and 2022 that those cost pressures would not be as extreme as they ended up being. On the private side, those prices are set on the basis of negotiations. That’s why the sharp cost increases in 2021 and 2022 have not yet been reflected in health care prices.”
Questions remain about how economic policy and legislation such as the Inflation Reduction Act will influence pricing and payment for insurance and health care, and who will bear the brunt of rising costs.
“Each year, insurers submit filings to state regulators that are hundreds of pages long and detail all of the assumptions that are going into their premiums for the coming year,” says Cynthia Cox, vice president and director of the Program on the ACA at KFF. “We have reviewed dozens and dozens of these filings, particularly in the individual health insurance market, and we found that they are raising their rates by about 10% going into next year, which is much higher than we have seen in the last few years.”
Hospitals also are responding to cost pressure, says Suzie Desai, senior director and sector head of the U.S. Not-for-Profit Healthcare Group at S&P Global Ratings
“The main takeaway is that it’s going to be a mixed bag in terms of what they will ask for and what they will get,” she says. “Historically, pricing has been right around the inflation rate. I don’t think prices will rise as fast as costs are increasing, but they certainly will try to close the gap. It’s going to vary by the payer and their position in the market, so it’s definitely going to be mixed going forward. We also will see what employers can bear. If they also are struggling from inflationary pressures, it’s going to be a challenging time.”
Related: Most Medicare recipients concerned about impact of inflation on prescription costs
Each of the presenters shared their thoughts on what to watch for in coming months:
- “The big thing is when we start to see the labor pressures ease for health care,” Desai says, “because that will play into pricing and what the needs are going to be for the hospital provider side.”
- “Nursing home and community care organization payments have fallen and average wages are growing, so that’s something to look out for,” Cox says.
- “The thing I will be following is the differential in price growth across different payers,” Rhyan says. “The cost pressures among all of these payers in providing care is exactly the same, but the way prices get set are very different. I think you are going to see a further divergence between private and public prices over time. The way that impacts the overall system is something that is important to track.”