Healthcare pricing has yet to reflect broader economy's rapid inflation, analysis suggests

Healthcare price increases during the past year pale in comparison to those seen across the rest of the economy, suggesting that the healthcare sector has so far been spared from the full impact of 2022’s rapid inflation.

Healthcare’s upward price movement has so far been led by hospitals and nursing homes as opposed to other medical care spend, per an analysis of Bureau of Labor Statistics data released Wednesday.

Policy analysts affiliated with the Kaiser Family Foundation and the Peterson Center on Healthcare wrote that those quicker increases are likely a reflection of staff shortages and rising average wages and are likely to continue “unless hospitals can find ways to operate with fewer staff.”

With health prices often set in advance by the Centers for Medicare & Medicaid Services or private insurance contracting, however, the analysts wrote that “the relatively high rate of inflation seen in the rest of the economy may eventually translate to higher prices for medical care. This may lead to steeper premium increases in the coming years.”

Medical care costs of the past two decades may have largely outpaced price increases across the rest of the economy, rising a cumulative 110.3% compared to the consumer price index for all urban consumers' (CPI-U's) 71% since July 2000, according to the analysis.

The rub, analysts wrote, is that medical care’s annual price increases from 2000 to 2022 consistently fell between 1% and 5% whereas a more volatile overall economy bounced anywhere from -2% to 5.5%.

The past couple of years has seen those characteristics stretched to their extremes. According to analysis, 2021’s annual CPI-U change for healthcare and the broader economy were 0.3% and 5.3%, respectively, while in 2022 those same measures came in at 4.8% and 8.5%.

Digging into the medical care, the CPI-U for July 2022 shows which areas of the industry are feeling the start of those pressures.

Inpatient hospital services (3.9% price annual change), outpatient hospital services (3.5%) and nursing homes and adult day services (4.5%) are on the upper end compared to slower rises in physicians’ services (0.8%) and prescription drugs (2.8%, based on market basket and not reflecting the introduction of new drugs). Medical equipment prices are also on the upswing with a 6.6% change.

The report noted that cumulative prices since summer 2009 have increased faster for consumers (51.4%) than they have for third parties such as employers or the federal government (31.8%).

Public and private payers' price split

The past year has also shown greater price increases for private insurers (4.1%) than both Medicaid (3.4%) and Medicare (-0.6%), the analysts wrote, although the recently finalized 4.3% increase in 2023 Medicare inpatient hospital payment rates should fuel a greater rise in the coming year.

A separate report released Wednesday by Altarum corroborated the split between private and public payers, pointing to a 5.4% increase among private payers and a 0.5% decline in Medicare since January 2021.

“All else equal, these price increases in care paid by private insurance will further exacerbate an already wide gap between public and private prices,” Altarum senior analyst Corwin Rhyan wrote. “This is especially true for hospital care, where the disparity between Medicare and private prices diverged by a whopping 7.2 percentage points in the last 18 months."

“The most important factors driving the trends going forward for private prices will be the extent to which overall economy-wide inflation slows and who has the balance of power in insurer/provider contract negotiations. For public prices, government policy decisions will continue to be the most important influencer of their growth,” he wrote.