Inflation Is Near A Four-Decade High. So Why Aren't Health Care Costs Significantly Higher?

As consumers choose a 2023 health insurance plan from employers in coming weeks, many will find rate hikes are modest when compared to everyday living expenses. It’s the first time in over three decades that overall inflation accelerated at a faster rate than medical costs.

It might not last long. Just like gas, groceries and used cars, the cost of medical care is rising in the third year of the coronavirus pandemic.

“There’s a lag effect,” said Cynthia Cox, vice president and director for the program on the Affordable Care Act for Kaiser Family Foundation, a nonprofit focused on health issues. “The cost of gasoline can change from one day to the next. That’s not really how health care prices work.”

Health benefits consultant Mercer’s survey of more than 1,700 large employers conducted this spring found these companies expected average health benefits costs to increase a modest 4.4% this year, about half the rate of inflation, which reached a 40-year high this summer.

But because prices are rising for medical supplies and prescription drugs and health care workers are commanding higher salaries in a tight labor market, employers are preparing for health care costs to spike. A Mercer survey released Thursday shows 43% of large employers think the cost of health care next year will exceed the amount companies budgeted.

“We see inflation running fairly hot right across most every sector of the economy,” said Beth Umland, Mercer’s director of research for health and benefits. “It’d be surprising if health care was the lone holdout, which it’s never been.”

Some analysts believe the full force of inflation gripping the economy won’t squeeze health care consumers until 2023 or later. Insurers negotiate reimbursement rates with hospitals and doctors and pass those expenses to employers and consumers. With inflation this summer reaching the highest level since the early 1980s, employers and consumers can expect more expensive bills for medical care and insurance premiums.

Health insurance costs will jump 7.4% next year as employers and consumers absorb bills from doctors, hospitals and drug companies, according to Segal, a benefits and human resources consultant.

“We’ll start to see the impact of inflation on health care costs in the next one to two years,” said Eileen Flick, senior vice president, director of health technical services at Segal.

Mercer projects that large companies will be cautious in passing along higher premiums, deductibles or copayments to employees and their families. More than 7 in 10 large employers won’t make workers pay more for coverage, while about 2 in 10 expect to charge workers more for monthly health premiums, Mercer said.

Umland said the message from most large employers this spring was “loud and clear” that they planned to enhance health benefits rather than trim offerings or charge employees more. Even though health care costs are rising more quickly than they anticipated just a few months ago, most employers believe affordable health benefits are an important tool to recruit and keep workers in a tight labor market.

Large companies are “reluctant to pass any of these excess costs on to employees, at least in 2023,” Umland said. “No guarantee what 2024 will hold.”

Hospital profits slump amid higher labor costs

Hospitals are grappling with higher costs from drug expenses, supplies and workers. A Kaufman Hall report analyzing data from more than 900 hospitals found these facilities are in “poor shape” with an average financial loss of less than 1% through August this year.

The financial crunch is partly due to labor expenses that are up 10.6% this year. Hospitals have struggled to maintain enough workers during the pandemic and have relied on agencies that provide temporary, contract health care workers such as nurses. Surveys predict many nurses plan to leave bedside care.

Elsevier Health, which provides health research and analytics, reported nearly half of U.S. nurses and physicians planned to leave their position within two to three years.

Hospitals and nursing facilities have paid lucrative fees to staffing agencies to hire contract nurses and will attempt to pass on those extra expenses to health insurers and employers who provide coverage for about half of all Americans.

But employers are also dealing with their own financial pressures and are seeking ways to slow runaway health costs, said Elizabeth Mitchell, CEO of Purchaser Business Group on Health.

Companies that insure about half of all Americans are taking a harder look at how much hospitals and other health facilities are charging.

“We understand hospitals have increased labor costs,” Mitchell said. “So do employers and families.”

2 in 5 Americans struggle to pay medical bills

While people who are insured through their employer might escape double-digit rate hikes for another year, consumers who directly purchase their own health coverage might not be so lucky.

A Peterson-Kaiser Family Foundation Health System Tracker analysis of preliminary rate filings in 13 states and the District of Columbia found next year’s median proposed rate hike for plans was about 10%. The report analyzed rate filings from 72 health insurers seeking to sell plans on Affordable Care Act marketplaces.

Health insurers must justify those proposed price increases based on how much they expect to spend on health care billings. These reports include rising prices paid to hospitals, doctors and drug companies, as well as how often insurers expect people will visit doctors or hospitals or fill prescriptions. These reports are reviewed by state health insurance regulators who decide whether to grant proposed rate increases.

One health plan, Capital District Physicians Health Plan in New York, warned that consumers would soon need to absorb inflationary costs from doctors and hospitals. In its filing, the insurer said a “correction is imminent.”

Health insurance is no guarantee people are shielded from expensive bills. More Americans have health insurance coverage than ever before: The Affordable Care Act extended health insurance coverage to millions of Americans, and even pandemic plans expanded Medicaid coverage to millions of Americans.

But even with coverage, 2 in 5 Americans struggled to pay a medical bill or past medical debt, according to a survey by the Commonwealth Fund.

Sara Collins, a senior scholar at vice president at Commonwealth Fund, said the survey shows even insured Americans are struggling with the cost of health care. Insurance plans require people to pay deductibles, co-pays and coinsurance, and those out-of-pocket costs are unaffordable for many.

“These costs are not only leaving people with medical bill problems and medical debt,” Collins said. “They’re not enabling people to get the health care that they need.”


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