Healthcare costs are rising again even as inflation falls

Two paramedics with a patient on a gurney enter a hospital.

By Don LeeStaff Writer

March 29, 2023 6:09 AM PT

WASHINGTON — During the pandemic, healthcare costs — usually a main driver of U.S. inflation — remained surprisingly stable, rising just about 2% annually even as prices for many goods and services soared more than three or four times that rate.

But signs are emerging that medical inflation is back as demand for non-COVID-19-related health services recovers and healthcare providers seek to make up for soaring labor costs and losses during the pandemic.

Prices for hospital services, the single biggest component of medical care, accelerated in December and even faster in January, to an annual rate of 5.5%, according to personal consumption expenditures data, the Federal Reserve’s preferred measure of inflation.

“Unfortunately, it’s going to be a problem that is pretty sticky in terms of consuming more and more of consumers’ pocketbook,” said Sunit Patel, chief actuary of health and benefits at Mercer, the consulting firm.

Consumer cost increases for nursing homes ran at a slightly higher rate of 5.7% over the last year; dental services rose even faster.

Hospitals are pressing for higher payments as their long-term contracts with medical insurers come up for renewal.

And greater market concentration caused by chains buying out smaller hospitals is helping to push medical inflation upward, as is the historically opaque nature of healthcare pricing.

“I’m very worried we’re looking at a big jump in [health insurance] premiums and out-of-pocket costs,” said Glenn Melnick, an expert in health economics and finance at USC.

Until recently, healthcare bills weren’t really a concern for Rex Thomas, a retired U.S. Postal Service maintenance mechanic who lives in Moreno Valley. They weren’t anything like his soaring gas and grocery bills, including the 40% more he’s paying to feed his two Siberian huskies.

But even as inflation on many things has been declining, he’s noticed his health bills moving in the opposite direction.

At open enrollment last fall, he learned his union-sponsored Cigna health plan premium would cost him 4.8% more this year after increasing 3.6% in 2022. He switched to another plan.

He said Loma Linda University Medical Center, his preferred hospital, began getting tougher on billing, wanting a $1,500 payment upfront for an upper endoscopy that he had sought.

“They were pricing it out of my reach,” Thomas said.

A hospital spokesperson responded in a statement that the medical center is “committed to providing our patients with clear and transparent billing practices. We strive to ensure that our billing processes are simple, efficient and that our patients understand their financial responsibilities.”

About half of the nation’s population is covered by employer-sponsored health insurance. In a tight labor market, many employers will be reluctant to pass on the rising costs directly to their employees, who typically pay a part of the premium.

But at the same time, Melnick said, employers are likely to adjust other parts of employee compensation, offsetting higher healthcare costs by giving smaller wage increases.

“That premium isn’t free. It’s reducing your take-home pay,” he said.

American households already are straining from loss of purchasing power because wage gains haven’t kept up with inflation. And many consumers are struggling with medical bills, which are the single biggest debt-collection item and factor in personal bankruptcies.

The recent surge in overall inflation came after decades of near-stagnant prices for most goods and services. Inflation jumped to a 40-year high of 9.1% last June, based on the consumer price index, and it’s since moderated to 6% in February. By the Fed’s preferred measure, which covers a broader range of spending, the latest inflation reading was 5.4% — still well above the central bank’s 2% target.

Even as policymakers have jacked up interest rates to cool spending and investment in order to dampen price increases, the nation’s inflation problem now has shifted from goods to services.

While prices for appliances, clothes and recreational equipment have come down from earlier surges, thanks to an easing of demand and supply bottlenecks, there’s been little relief to consumers for services like rents, transportation, dining out and personal care.

What makes the expected jump in medical inflation particularly worrisome is that healthcare makes up a big chunk of people’s spending. And rising prices for services tend to decline more slowly than for goods, which means that could prolong the current cycle of hot inflation.

Healthcare spending accounts for almost one-fifth of the nation’s economy, and the medical services component has a similarly disproportionate impact on inflation, based on personal consumption expenditures data.

On the positive side, some things may help temper the trend of rising healthcare costs.

Telemedicine, for example, got a big boost during the pandemic and could help lower expenses by reducing visits to doctors’ offices and providing other services remotely. Costs for physician services have been stable this past year.

The mushrooming of outpatient clinics and nontraditional places for medical care, including pharmacy chains, also could put some competitive pressure to hold down prices.

But healthcare inflation tends to go hand in hand with labor costs. And the shortage of healthcare workers and the resulting surge in their wages over the last few years may have only begun to be factored in to overall medical pricing, in part because providers are locked into long-term contracts with insurers.

Healthcare insurers typically sign one- to three-year-long contracts with medical providers. The contracts are meant to assure lower prices for patients and predictable income for providers.

Since COVID-19, hospitals have been grappling with higher turnover. A lot more employees retired or quit, burned out by the stresses of the pandemic and frustrated by management’s response to staffing needs. Many nurses left to work as traveling nurses for significantly more money.

Caroline Burris, who is based in northeast Nebraska, began as a traveling registered nurse in 2019. When COVID-19 hit and demand for nurses spiked, her pay for a 36-hour week jumped from $1,200 to more than three times that amount. It’s since settled down to about $2,200. “Pay was crazy,” said the emergency room nurse.

Before the pandemic, expenses for traveling nurses and other contract workers made up 10% of overall hospital labor expenses. Last year that was still running at 33%, said Erik Swanson, senior vice president of data and analytics at Kaufman Hall, a leading hospital research and consulting firm.

Adventist Health, which operates 23 hospitals and scores of clinics, mostly in California, reported that its employee compensation expenses jumped 11% in the nine months ending Sept. 30, compared with the same period a year earlier. It’s a big reason the Roseville, Calif.-based company lost $254 million during those nine months.

“Demand for healthcare workers is still running very strong,” said Matthew Notowidigdo, a labor and health economist at the University of Chicago Booth School of Business. “That’s why I’m expecting to see price increases — in order to hire these workers, you’re having to offer more.”

At the same time, hospital utilization overall hasn’t yet recovered to pre-pandemic levels, so revenues aren’t keeping up with expenses. And that’s contributed to the continuing consolidation in the health industry.

Across the country, big hospital companies have gobbled up smaller rivals and merged with other large chains. Medical groups have bought out doctors’ practices, also to gain leverage in negotiating with giant health insurers.

Meanwhile, over the last decade private equity investors have taken over more nursing homes and other senior facilities. And studies have shown these acquisitions have led to higher costs.

Though healthcare has been lagging overall inflation since COVID-19, historical trends suggest a catch-up is bound to happen, said Matthew Eisenberg, a health policy and management professor at Johns Hopkins University.

Consumers may react to higher prices by opting for cheaper, high-deductible plans in which insurance kicks in only after the insured pays a large amount out of pocket.

Eisenberg worries that will prompt some people to forgo or delay care, leading to potentially worse health and financial outcomes, for those insured and the broader economy.

“That side has been squeezed,” he said of the cost-shifting to consumers. “How much more juice can we get out of squeezing it?”