It’s an axiom of healthcare administration: medical inflation outpaces the Consumer Price Index for All Urban Consumers (CPI-U). And figures from the U.S. Bureau of Labor Statistics (BLS) figures have typically borne this out. In the decade from 2011 to 2020, there was only one year—2017—in which medical inflation was not greater than the CPI-U and even then, the difference was relatively small: a 1.8 percent increase in medical inflation, compared to a 2.13 percent annual increase in the CPI-U.
Medical inflation lagged again in 2021—2.2 percent compared to 4.7 percent. But the difference in 2022, as the United States faces the worst inflation in four decades, has been startling.
According to the most recent BLS statistics (for August 2022) the overall inflation rate of medical inflation for the preceding 12 months was 5.4 percent. While this number might have seemed staggering in the previous decade, in which medical inflation averaged 2.73 percent, it paled in comparison to the CPI-U for the same period of 8.3 percent.
While the shift in position between the two rates may seem odd, it isn’t inexplicable, and it isn’t permanent.
Slow and Steady
Healthcare costs have historically risen steadily over time and their increases have been steeper than those of the CPI. An analysis by the Peterson-Kaiser Family Foundation Health System Tracker identified an increase of in medical prices of slightly more than 110 percent between 2000 and 2022. This compares to a 71 percent increase in the CPI in the same period.
Consumers might remember wild swings in the prices of consumer goods in the previous decades. But for medical costs (which, for the purposes of BLS calculations, includes the costs of medical services, drugs, and equipment).they have come to expect annual increases without extreme fluctuations.
An important factor in limiting fluctuations in medical inflation is the fact that prices for healthcare services are typically contractually set in advance for a specified period. Many prices for 2022, for example, were finalized in the first half of 2021, long before the historic spikes in other consumer prices. While hospitals and physician practices may feel the the impact of higher fuel or supply prices, they are not positioned to immediately pass these costs on to consumers.
In addition, the pandemic may have temporarily insulated segments of the healthcare sector other economic impacts.
Doug Holtz-Eakin, President of American Action Forum, and a former Congressional Budget Office Director, observed that “to the extent there is something special in health care, it would be the taxpayer funds made available through the CARES Act, American Rescue Plans, and other pieces of legislation. This probably slowed the need to pass along cost increases as higher prices, but those days are over.”
On the horizon
Several factors may contribute to medical inflation in the near future. Foremost among these will be staffing costs. Applied Policy has previously written about a looming physician shortage. McKinsey predicts a shortage of between 200,000 to 450,000 registered nurses by 2025. The healthcare sector will also feel the impact of increased costs for non-clinical labor.
Another impact is expected to be felt in insurance premiums. Global services firm AON anticipates a 6.5 percent increase in the average cost of what U.S. businesses pay for employee healthcare in the coming year. Individuals who purchase their health insurance under the Affordable Care Act can expect premium increases of up to 10 percent according to the Kaiser Family Foundation.
Much of economics is cyclical. As Holt-Eakin observed, “Health and other service industries are likely to have above-average inflation at some point in the future.”