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How Inflation Impacts Healthcare Costs 

inflation

We’re in the midst of record-setting inflation in the U.S., and the ripple effects of rising costs are touching every different type of field and industry. 

As of summer 2022, the annual inflation rate was 9.1%, a huge jump from an average of roughly 1.3% for most of 2020. COVID-19 and its cascade of related crises certainly have a lot to do with this, but of course, many other factors play into it. 

Causes aside, how does this suddenly very high rate of inflation affect the healthcare industry? And might current inflation affect related fields? To answer these questions, it’s useful to take a basic look at what inflation is and how it spreads through an economy. 

The Big Picture

While inflation is often portrayed as an extremely harmful thing in economies, there are many situations where consistent inflation can indicate stability. The U.S. Federal Reserve (The Fed) attempts to hold inflation to a 2% increase in prices across the board, annually. The Fed has long posited that slow and steady inflation actually encourages business activity throughout our economy. 

In other words, as long as everyone can plan for this rate of inflation, everything is OK. 

Steady inflation also directly does a number of good things for us. When people sign long term loans, they can count on the money they pay back to the bank being worth less than when they took out the loan, thus encouraging both borrowing and lending. 

Inflation generally is a direct indicator that more people in the national economy have more disposable income, and are more readily willing to spend it. As people put more money back into the economy, prices go up accordingly. This is often a sign that the economy is growing. 

The problem with inflation is that it can quickly get out of control. Because all prices in a national and increasingly globalized economy are connected to each other somehow, even a slight increase in price of a fundamental good (think gas, energy, food, water, housing, or other essential commodities) can result in a spiraling of cost that drives prices of everything else up. 

Inflation fundamentally leads to more inflation, making it hard to control. 

Hedging Against Inflation

While this may sound bad, there are many types of property and certain industries that act as barriers against rapid and uncontrolled inflation. For example, many investors view real estate as a way to insulate themselves from these kinds of wild swings. 

Industries such as energy, commodities, and the finance sector also tend to do better during times of high inflation. Tangible assets that have real-world value are less likely to become less valuable overnight. 

But from a consumer standpoint, some industries take longer to be affected by inflation than others. Healthcare is one of these.

Healthcare Costs and Inflation

Healthcare as an entire field often takes longer to respond to rapid inflation than other industries. While the current consumer inflation rate is over 8%, healthcare costs are currently only rising by a rate of 1.9%. While this might sound great for now, there’s reason to believe that this rate may soon begin to rise and approach nationwide rates of inflation. 

Healthcare costs are very frequently locked into annual or multi-annual contracts that don’t respond immediately to the larger economy. For example, hospitals or medical organizations that buy medical products from suppliers often contractually set the prices for those products in order to keep costs down, and to some extent, are able to avoid this very problem. 

Government and commercial payers are often incentivized to set prices beforehand, both to secure demand, and to guarantee supply. Unfortunately, this type of hedge only lasts as long as the contracts themselves. When the current batch of annual contracts are up, all parties will be forced to renegotiate, forcing the healthcare industry to catch up to rising costs across the board. 

The Future of Healthcare Inflation 

While current healthcare inflation is hovering right around a pre-pandemic rate, it’s clear that this won’t last forever. If inflation rates in the healthcare industry rise even slightly, those who are most at risk for an increase in incidence for health problems could face huge consequences by retirement. 

A healthy 55-year-old couple might have to deal with an excess of $267,000 extra dollars in health expenses by the time they turn 65 if healthcare inflation rates are even just a measly 2% above the goal the Fed aims for. Because many peoples’ retirement savings are stable investments that don’t quickly adjust to inflation, this can add up to huge unexpected costs. 

Luckily, there are things that both employees and workers can do to offset the changes that may be coming. 

For one, employers can work to offer employees better health insurance and easier ways to pay for unexpected medical costs. There are a lot of great plans out there for employers to offer to their employees, and since employers covered a total of 155+ million Americans last year, the quality of the healthcare that folks receive through their work is paramount. 

Employers can also offer options like medZero’s on-demand payment plan, allowing employees to pay for medical bills with zero interest when they need care the most.

Finally, employers can be aware that this shift is coming and plan to have to spend more on healthcare for their employees. While going through a period of high inflation can be a scary prospect for employers, the cost of sick or injured employees who defer care is even costlier, costing companies hundreds of billions per year.

By preparing now and updating their healthcare plans, employers will be ready for when healthcare inflation does eventually rise. 

medZERO is unlocking a smarter way for employees to pay for care. Find out how.

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