More Inflation Is On The Way, And Your Health Care Bills Are Set To Rise. Here's Why.

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Rising rents and food prices are keeping us company: health care costs are also rising, and worse, they're likely to rise much more, keeping inflation high for some time.

Inflation is expected to increase annual health care spending in the United States by $370 billion by 2027 compared with pre-pandemic projections, consulting firm McKinsey estimated in a September report.

The health index, a subset of the consumer price index, accelerated to 0.7% in August, from 0.4% in July. It rose 5.4% last year, the biggest 12-month rise since 1993, but still below headline inflation of 8.3%.

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This lag between health care inflation and general consumer inflation can worry consumers.

"This is unusual as health care prices have historically outpaced prices in the rest of the economy," a team of analysts led by Emma Wager of the Peterson-Kaiser Health System Tracker said in a report last month. "This could lead to further premium increases in the coming years."

Why is health care more expensive?

Higher input and labor costs drive growth.

At the start of the pandemic, healthcare prices rose due to supply disruptions and increased demand. According to McKinsey, between 2019 and 2022, prices for pharmaceutical products increased by 21% and for consumables by 18%. This cost is still higher than normal, but is showing signs of slowing.

On the contrary, analysts note that labor costs continue to rise significantly and are likely to exceed the general rate of inflation.

"The work is very important because it can be demanding," said Shubham Singhal, director of McKinsey's global health, community and social sectors practice.

He expects wages to continue to rise as the health worker shortage worsens and demand for services increases, in part due to an aging population.

Between 2019 and March 2022, a measure of hospital labor costs, called the average labor cost per adjusted discharge, rose 37% from $4,009 to $5,494, Kaufman Hall said in a May report.

Will health insurance premiums go up?

Consumers who buy their own insurance could see their premiums rise dramatically over the next year.

According to preliminary estimates from the Peterson-Kaiser Health System Tracker, 72 insurers in 13 states and the District of Columbia in Affordable Care Act (ACA) markets will have an average proposed premium increase next year that is 10% higher than last years.

Health care prices are set at least a year in advance, creating a lag before wage increases and other costs related to general inflation are fully reflected in health care costs.

Providers who have faced rising costs over the past 18 months have recently had an opportunity to renegotiate payments and pass some of the additional costs on to insurance companies or government agencies.

By 2024, all employer spending "will be in full effect," Singhal said. "A lot of that will go back to consumers because employers share premiums with workers."

"It's a slow train," he said, "but it runs."

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How do health care costs affect inflation and the Fed's interest rate decisions?

Because health care, like rent, is not usually subject to periodic price increases, economists consider this inflation to be "fixed" or permanent when prices rise. They rise long and fall long.

Inflation could stay elevated for longer, forcing the Fed to raise the overnight interest rate even more to quell inflation. Most consumer rates follow the Fed's policy rate higher, making borrowing more expensive and discouraging spending. Less spending means less demand, which lowers inflation.

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How can health care costs be reduced?

Layoffs and increased productivity can reduce costs, McKinsey said.

More than 25% of executives surveyed by McKinsey believe they may have to cut at least 10% of their workforce, mostly non-clinical staff such as nursing assistants, over the next six to 18 months, it said. he.

Managers (66%) also want to use technology to improve their productivity, especially when working with documents.

In the long term, Singhal said, the industry can accelerate value-based care that links payment to quality of care. This is in contrast to the prevailing fee-for-service approach, where providers are paid for services provided based on set fees or annual payment plans.

Another strategy would be to shift some of the hospital care to other countries. "Some surgeries can be performed more cheaply in an ambulatory surgery center than in a hospital," Singhal said. "Home care facilities can also be of the same or higher quality at a lower cost."

Medora Lee is the money, markets and personal finance reporter for USA TODAY. You can reach him at mjlee@usatoday.com and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.

This article originally appeared on USA TODAY: More inflation is on the way and your health care bills will rise. That's why.

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