Healthcare Inflation Unusually Trails General Inflation, Squeezing Financially Fragile Employees from Both Sides

Many are questioning how the U.S. healthcare inflation rate compares to the rest of our nation’s economy.

The simple answer: it’s significantly lower, which is unusual given that healthcare inflation historically outpaces general inflation.

According to McKinsey, inflation is at record highs. Consumer prices have rarely risen faster than healthcare inflation, but that’s the situation today. The impact of inflation on the broader economy has appreciably driven up input costs in healthcare. Premium increases are likely to follow.

The Peterson-KFF Health System Tracker, an information hub dedicated to monitoring and assessing the performance of the U.S. health system, confirms that overall healthcare service prices as of 2023 increased by 2.3% from the previous year, compared to a current 5% general inflation rate. This analysis applies Bureau of Labor Statistics (BLS) data, including the consumer price index (CPI) and producer price index (PPI) to analyze prices for medical care compared to other goods and services.

Root Cause: Temporary Downshift in U.S. Healthcare Utilization

The reversal of this decades-long inflationary trend has many roots, the largest likely being a downshift in healthcare service utilization. Analysts attribute this to the suppression of medical claims during the COVID-19 pandemic when a large allocation of care, including elective surgeries, was postponed.

One significant shift was a lower demand and less access for in-hospital treatment, where utilization likely declined 20-33%. In areas where utilization increased, it was specific to treating COVID patients, likely funded by the expansion in services provided by the federal government, as well as  taxpayer-subsidized coverage that limits covered charges, such as Medicare and Medicaid.

Employee Perspective – Financial Fragility is Compounded

American workers will continue to experience increases in the costs of health services and premiums that exceed wage increases.  Rapid healthcare inflation compounds the large segment of Americans who are already financially fragile due to  general inflation. They are already squeezed and unprepared for the increased cost of regular household expenses and out-of-pocket medical expenses. As a result, surveys by KFF reveal that half of the population goes without healthcare due to concerns over costs, and one-quarter of those who receive care have financial hardship with paying medical bills.

Employer Perspective – Health Plans Have Yet to Fully Realize and Adjust for Inflation

Amid this challenging economic environment, there is consensus that employee healthcare costs will continue to rise. For example, projections from an Aon survey indicate the estimated average costs for U.S. employers that pay for their employees’ healthcare increased 6.5% — from $13,020 per employee in 2022 to more than $13,800 per employee in 2023. They say this is mainly the result of economic inflation pressures, with escalating costs more than double the 3% increase to healthcare budgets that employers experienced from 2021 to 2022.

In another study, HR consultancy Mercer reports that employers can expect their health plan costs to rise 5.6 percent on average, per employee. While significantly higher than the premium increase of 4.4 percent that was expected for 2022, the 2023 increase still lags overall inflation.

Some believe that health care cost inflation will catch up and exceed the general rate of inflation in 2024.  End-of-year health plan renewals may see significant increases in the cost of coverage (premiums, contributions) and/or higher point of purchase cost sharing (increased deductibles, copayments, out of pocket expense maximums).

Health & Wealth Strategy

Finding the right balance between a benefit package that is both adequate and affordable yet financially sustainable has never been easy, but it is especially challenging given the current labor market and volatile economic conditions. To counter inflationary trends, experts  recommend plan sponsors help participants build savings to reboot your health rather than purchase more costly insurance as part of a ’health and wealth’ strategy that optimizes both savings and financial preparedness.

A strategic, holistic approach  would incorporate the most effective strategies for addressing today’s inflation and economic challenges. These strategies include effectively designed acquisition cost-based pharmacy pricing, HSA-capable coverage, reference-based pricing, adequate participant protections against balance billing, and participant advocacy and litigation support.

Rising inflation and its effect on healthcare costs and spending put price transparency in the spotlight. There are strategies that take advantage of price transparency to capitalize on cost containment initiatives and fully optimize value. This insight has potential to transform an employee’s health coverage usage, putting participants as healthcare consumers in the driver’s seat, and the economic purchasing power and decision-making in their hands.