How Inflation is Impacting the Healthcare Industry

by | 28 February 2022

Inflation is everywhere we look these days: in the grocery store, where the price of eggs has risen 23%, at the gas pump, where fuel prices have reached their highest since 2014,  and at the pharmacy, where drug makers have raised the cost of most medications by 6.5%.

The consumer price index for all items rose 0.6% in January, driving up annual inflation to 7.5% – the highest in 40 years.

Outside of our own pantries, several industries are being hit hard by rising inflation. Farmers are up against steep costs for equipment and seed and the construction market is struggling with supply chain backlog driving up cost and higher wages for labor and trades. The healthcare industry is also now battling its own unique impacts due to inflation, particularly in the hospital setting impacting care delivery and staffing.

The Impact for Providers
Healthcare organizations caught a break at the start of the year as demand for medical care services were up 0.6% in January from December, the strongest pace since before the pandemic.

However, the Wall Street Journal reports healthcare inflation is creeping up after remaining fairly modest through the pandemic, with the lack of increase likely due to people forgoing their normal checkups and appointments.

These climbing costs may cause a 1.2 to 2.8 percentage point decline in profit margin for providers, per McKinsey. Beyond profit margins, inflationary pressures are affecting the health system’s labor force, ongoing projects, supplies and facilities, as stated by the CFO of Bellin Health on a recent episode of the Becker’s Healthcare podcast.

The Impact for Patients
The declining profit margins that health systems are facing have started to trickle down to consumers through rising costs.

The U.S. Bureau of Labor Statistics reports a major factor contributing to the overall inflation in January was the rise of hospital outpatient care prices, which increased 1.6%. These outpatient services can include anything from lab tests to x-rays and radiology procedures to preventative screenings and more.

These hikes have disproportionately affected different populations. People aged 65 and up experienced 5.8% inflation, as seniors on average spends 12% more on healthcare than younger age groups.

For the 180 million Americans that are enrolled in commercial health plans, they will also face spiking premiums in addition to higher deductibles and out-of-pockets, essentially getting “squeezed from both sides.”

The Impact for Workers
Before inflation began setting in, the healthcare market was already in a labor crisis, with a record number of employees left fleeing the workforce or changing careers. Healthcare workers are facing pandemic stress, overall burnout, and now steep increases to their cost of living.

With inflation adding mounting pressure to a hospital’s bottom line, many are looking for financial reprieve through reducing annual raises. In a new report from PayScale that surveyed 5,000 respondents, results showed only 32% of healthcare organizations planned to give employees a raise of more than 3% in 2022.

Given the 7.5% rise in inflation, this leaves our frontline heroes – nurses, specialists, facility staff and more – at a 4.5% income deficit.

There are actions that healthcare systems can take now to reduce the impact on consumers, staff and hospital operations, according to McKinsey, such as boosting productivity, optimizing labor and building a stronger infrastructure. After making it through two years of intense unpredictability during the pandemic, the healthcare industry has boosted its immunity to operating in a challenging environment. For the remainder of 2022, time will tell how the hospital and healthcare industry respond to their newest challenge and can weather the squeeze of inflation.

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