A Real Economy publication

Inflation trends in health care: Fall 2022

Aug 19, 2022

Inflation trends in health care key takeaways

More patients are faced with the unsettling reality of having to choose between paying rent, buying food or seeking medical care.

While providers will feel the most pressure, wage inflation will challenge all health care organizations.

Health care organizations will have to leverage technology to augment human labor.

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Health care Economics

Health care is not immune to inflation concerns. The pandemic challenged the paradigm that health care is insulated from general macroeconomic cycles and concerns, including inflation.

Inflation has hit generational highs. Both headline and core inflation, which is inflation excluding the volatile categories of energy and food, have reached levels not seen since the early 1980s. Inflation will continue to affect the health care ecosystem in two distinct ways: first by squeezing overall payer and provider margins, and second by reducing some patients’ ability to pay copays, deductibles and out-of-pocket costs.

While providers will feel the most pressure, wage inflation will challenge all health care organizations. The supply of health care labor, both clinical and nonclinical, will not meaningfully improve in the short- or medium-term. Meanwhile, demand for that labor will continue to increase, which will continue to push wages higher. Health care organizations will not be able to hire their way out of this shortage.

Meanwhile, health care wages are growing at rates of nearly two to three times that of the post-global financial crisis, pre-pandemic period. From June 2009 through February 2020, health care and social assistance wages increased at an annualized rate of 1.94%. Since the pandemic began, these same wages have increased 3.77% on an annualized basis. Senior care has seen a nearly threefold increase in wage growth. Growth of both health care and senior care wages has exceeded that of all service sector wages, which have increased 1.7% since the pandemic began. Pre-pandemic, many providers budgeted for narrower margins, assuming 2% to 3% wage increases per year. 

Health care inflation trends: Wages have been growing two to three times faster since the start of the pandemic

Health care inflation trends: Wages have been growing two to three times faster since the start of the pandemic
Health care wages have been growing two to three times faster since the start of the pandemic

The senior care predicament is especially challenging. Wages are growing at nearly three times the pre-pandemic rate, and yet the sector cannot attract enough talent. Senior care employment is down 372,700 jobs from pre-pandemic levels, which represents a decrease of 11.14%. One in nine people employed in senior care has left the industry following March 2020.  Meanwhile, 10,000 Americans turn 65 each day. Despite the demand and higher wages, senior living providers cannot attract enough talent.

Health care providers are also experiencing elevated growth rates for medical supply costs. Over the post-global financial crisis and pre-pandemic period, medical supply costs grew 1.79% per year, on average. Since the pandemic began, those costs have growth 2.56% annually, which represents a 40% increase in growth.

Compounding issues

Most ecosystems are experiencing heightened inflation. However, unlike other service sectors, health care has limited ability to pass wage and supply cost increases on to customers, which in health care means payers—including CMS—employers, and patients. Government and commercial reimbursement rates lag a year or more, if they increase at all, and likely won’t match inflation.

Payers will feel pressure to increase rates while also paying their employees significantly more. Meanwhile, their customers (employers) are also pressured to manage benefit cost increases amid rising wage increases.

The rate of wage growth may slow in the medium- and long-term. However, nominal dollar wages will not decrease. Health care organizations will not be able to decrease the actual hourly wage or salary paid to employees. 

Meanwhile, the costs of consumer goods that patients are paying for are increasing at accelerated rates. Year over year, the cost of the following items has increased:

Apparel—up 5.2%

Rent—up 5.5%

Food—up 10.4%

Energy—up 41.6%

Gasoline—up 60.6%

These increases exceed the wage gains most employees have received over the past year.

The way forward

More patients are faced with the unsettling reality of having to choose between paying for rent, food, or gas to get to work and paying for, or even seeking, medical care. This is another element of our public health crisis, and it will challenge provider margins for the foreseeable future, as patients are less able to pay their out-of-pocket responsibilities.

Health care organizations will have to leverage technology to augment human labor. Technology is inherently disinflationary. It allows organizations to do more with less. In the case of health care, technology won’t necessarily replace human labor. Instead, it will allow organizations to attract, retain and pay enough humans to meet current demand. This will ease balance sheet constraints and dull the impact of inflation for payers, providers and patients.

RSM contributors

More from the fall 2022 health care industry outlook

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