Why inflation has limited impact on healthcare trends

Inflation is rising

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) for July rose 5.3% over the last 12 months.¹ The consumer price index measures the change in prices paid by consumers for a market basket of services. The CPI-U reflects spending patterns for all urban consumers (vs. urban wage earners and clerical workers) and represents about 93% of the total U.S. population.¹

The chart in Figure 1 shows the CPI-U for the last 10 years.²

Figure 1: CPI-U (All items) 2011 to July 2021

The August 2021 increase represents a significant increase over the prior 10 years, where it has not exceeded 3% since 2011. The primary drivers of the recent increase are shelter, food, energy-related commodities like gas and oil, and services that rely on these commodities like public transportation and vehicles.¹

Healthcare trends still rising but not driving inflation

A notable omission from the list of drivers is healthcare. Per capita national healthcare expenditures have increased by about 4% annually since 2016, and the federal government projects them to increase by 4.9% per year between 2021 and 2028.³ In addition, national health expenditures are expected to steadily increase from 18.2% to 19.7% of gross domestic product (GDP) between 2021 and 2028.⁴ This increase in the percentage of GDP indicates that healthcare is increasing at a faster rate than the general economy and has continued to cause concern about the sustainability of our current healthcare system.

The chart in Figure 2 show the CPI-U for All Items, Medical Care Services, and Prescription Drugs for the most recent 12 months.⁴ Medical Care Services include professional services (physician services, dental services, eyeglasses and eye care, and services provided by other professionals) and hospital and related services (inpatient hospital services, outpatient hospital services, nursing home and adult day care services, and care of invalids and elderly at home), and health insurance administrative expenses.

Figure 2: CPI-U Most recent 12 months - All items vs. medical care services vs. prescription drugs

The CPI-U for All Items annual trend began to grow significantly (almost doubling) in March 2021. The CPI-U for Prescription Drugs has experienced a similar increase but at an overall lower level. The CPI-U for Medical Care Services has decreased over the most recent 12 months. So how do these recent trends in inflation impact healthcare?

Inflation is only one component of healthcare trends

While the consumer price index reflects changes in price paid by consumers for a market basket of services, healthcare trends are more complex and have multiple components, as show in Figure 3.

Figure 3: Healthcare Trends

Utilization

Utilization trend reflects the change in the consumption of healthcare services (e.g., hospital admissions, office visits, prescriptions) due to external influences like alternate treatments, catastrophes, geographic access, health plan utilization management, new prescription drugs, new technology, or pandemics.

Average unit cost

Average unit cost trend reflects the change in the amounts paid per unit of service to hospitals, physicians, pharmacies, and other providers prior to any member cost sharing like deductibles, copays, or coinsurance. This is primarily driven by changes in provider contracts but can also reflect the mix of services due to changing treatment patterns or health plan steerage (e.g., greater use of freestanding facilities vs. hospitals or use of prescription drugs vs. medical treatment) and/or the mix of providers (e.g., more services done by certain hospitals).

Population

Population trend reflects changes in morbidity due to factors such as aging, mix of members by geography or industry, or adverse selection due to premium rating actions.

Benefits

Benefit levels can impact healthcare in a number of ways:

• Cost sharing creates financial incentives and disincentives to seek treatment, which result in corresponding opposite effects on utilization (e.g., an increase in cost sharing reduces utilization).
• Benefit maximums limit the number of services, so changes in benefit maximums have a similar effect on utilization.
• Health plans use cost sharing to steer care toward more cost-effective settings. As decisions are made about where to seek treatment, the average unit cost is impacted.
• The richness of the benefits can impact the type of member attracted to the plan and create adverse selection as higher-utilizing (less healthy) members choose plans with lower cost-sharing benefits and positive selection when lower-utilizing (healthier) members choose higher cost-sharing benefits. This also impacts the average unit cost of treatment due to the underlying acuity of the member.

As noted above, the consumer price index reflects changes in price while healthcare trends are impacted by changes in utilization, average unit costs, population, and benefits. Of the four components of healthcare trend, the consumer price index can impact the change in average unit costs; however, there may be a lag between the recent inflationary change in the consumer price index and healthcare trends.

Contracts limit ability to adjust for inflation

Hospitals, physicians, pharmacies, and other providers have contractual arrangements with health plans to specify the reimbursement terms like fee schedules or value-based care. These contracts govern how the health plans will pay the providers for their services. The contracts typically renew annually and can have built-in inflators, some of which might be indexed to the consumer price index. Commercial contracts can be linked to government-sponsored reimbursement terms (e.g., 105% of Medicare), so providers would also realize the change in the government-sponsored terms. Providers also contract with government agencies for government-sponsored healthcare like Medicare and Medicaid, which can be impacted by federal and state budgetary issues.

Providers that have contracts that pay as a discount off billed charges have another lever. They can increase their chargemaster, which is essentially the list price for services and is generally unregulated by federal and state government. A higher chargemaster results in a higher rate of reimbursement as the discount is applied to a higher starting cost.

Employers and health plans set premium rates and/or employee contributions for future periods and guarantee those premium rates for 12-month contract periods. Employers rarely change employee contributions during the contract period.

Employers, providers, and health plans feel pressure of inflation

Employers, providers, and health plans are also businesses with capital needs, labor/wage costs, maintenance costs, and vendor costs. Providers face the inflationary pressures of the recent economy like any other business except their ability to pass the higher costs on to their customers (e.g., health plans and government agencies) is hindered by their contracts. Because contracts with health plans may have longer terms, the providers may not be able to negotiate higher reimbursement rates until the contract’s next renewal.

Government agencies have prescribed reimbursement terms that can change each year; however, the providers have extremely limited power to influence these terms. It is “take it or leave it.”

Employers and health plans face rising healthcare trends as the risk-taker and must deal with the impact of inflation on administrative costs (e.g., labor/wage costs, vendor costs, etc.).

Like providers, employers and health plans also have contractual limitations. As healthcare trends and administrative costs increase, employers and health plans may not adjust the employee contributions and/or premium rates until the next contract period.

Inflation may not impact healthcare trends

Inflation, even medical price inflation, can contribute to higher healthcare trends; however, we may not see the impact immediately or at all, depending on how the economy responds. The Federal Reserve chair, Jerome H. Powell, recently stated “Inflation has increased notably and will likely remain elevated in coming months before moderating.”⁵ Inflation is a concern for everyone; however, it may not directly impact healthcare trends in the near future if it moderates as expected. Inflation impacts the bottom line so the short-term and long-term impact should be considered. Expenses should be monitored, and contracts reviewed to understand the timing, impact, and need for changes.

¹U.S. Bureau of Labor Statistics (September 14, 2021). Consumer Price Index – August 2021. News release. Retrieved September 21, 2021, from https://www.bls.gov/news.release/pdf/cpi.pdf.

²U.S. Bureau of Labor Statistics. Historical Consumer Price Index for All Urban Consumers (CPI-U): U.S. City Average, All Items, by Month. Retrieved September 21, 2021, from https://www.bls.gov/cpi/tables/supplemental-files/historical-cpi-u-202107.pdf.

³Sean P. Keehan, Gigi A. Cuckler, John A. Poisal, Andrea M. Sisko, Sheila D. Smith, Andrew J. Madison, Kathryn E. Rennie, Jacqueline A. Fiore, and James C. Hardesty (April 2020). National Health Expenditure Projections, 2019–28: Expected Rebound In Prices Drives Rising Spending Growth, Table 02 National Health Expenditure Amounts and Annual Percent Change by Type of Expenditure.xlsx. Health Affairs.

⁴U.S. Bureau of Labor Statistics. Archived Consumer Price Index Supplemental Files. Retrieved September 21, 2021, from https://www.bls.gov/cpi/tables/supplemental-files/home.htm.

⁵Smialek, J. (July 14, 2021). Fed Chair Powell sees months of high inflation, but then moderation. New York Times.