A long Era of Low Health Care Inflation May Be Coming to End

Source: Bloomberg
Since the late 2000s Great Recession, historically low increases in health-care prices have helped hold down inflation. That may be about to change.
Hospital prices increased 2.2 percent in December, the fastest rate in four years, according to an analysis by Altarum, a nonprofit health-care research organization. The group analyzes data from the Bureau of Labor Statistics and other sources to estimate the underlying prices that health plans and consumers pay for medical goods and services.
While overall medical inflation was restrained last year, the report warns that “we could very well be at the cusp” of a return to a more typical pattern where increases in health-care prices outpace the broader inflation rate.
“We have lots and lots of experience where health-care prices grow more quickly than economy-wide prices,” said Paul Hughes-Cromwick, co-director of sustainable health spending strategies at Altarum. The reversal in recent years “is not normal,” he said, and he doesn’t expect it to last.
In recent days, financial markets have become more concerned about the potential for a faster-than-expected increase in prices throughout the economy. A report showing strong wage gains by U.S. workers last month helped briefly push stocks into a correction, a retreat of more than 10 percent from their recent peak.
Rising prescription-drug prices have made headlines, but drugs account for only 10 percent of total health spending in the U.S. The bulk of outlays goes to hospitals, doctors, and other professional services. Price increases in those sectors have been restrained, partly because of limits on how much Medicare pays hospitals and physicians under the Affordable Care Act and other legislation.
Slow growth in health-care prices has been dragging down the core price index for personal consumption expenditures, the Federal Reserve’s preferred measure of inflation, economists at the Federal Reserve Bank of San Francisco estimated in November. If health inflation matched its pace in the mid-2000s, it would add 0.3 percentage points to the current rate of inflation.
Though health-care inflation is expected to accelerate, “it appears unlikely to return to its pre-recession level,” which could moderate overall inflation, the Fed economists wrote. Some of the changes that held down Medicare payments are permanent, and commercial insurers often base their reimbursement rates on Medicare, said Adam Shapiro, a research adviser at the San Francisco Fed.
Like the government, employers have tried to hold down their health costs. They’ve shifted more of the burden onto workers through higher deductibles and cost-sharing. Both the U.S. government and private health plans are experimenting with paying providers based on how well they take care of patients, rather than the volume of services they provide.
At the same time, hospitals and doctors groups are increasingly combining their businesses, giving them greater power to command higher prices.
Prices are just one determinant of overall health-care spending, along with the amount and intensity of care. Health spending accounts for roughly 18 percent of overall U.S. economic activity, the highest in the developed world.
“We’re already devoting too much of our overall economic product to the health sector and not getting a great value for it,” Hughes-Cromwick, the Altarum official, said. Any increase in medical prices will further strain the budgets of governments, employers, and households that pay for it, he said.
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