Healthcare and Inflation: Hospitals Are Starting To Feel the Squeeze

There are several contributing factors to inflation that health industry executives will immediately recognize.

When it's slow and gradual, inflation can indicate a strong, healthy, and productive economy. In fact, for years the Federal Reserve targeted a long-term inflation rate of 2%. When it spikes, though, as it has recently with 8.6% in May 2022, marking the highest it has been in more than 40 years, inflation can be incredibly disruptive, both in how businesses are run and how consumers choose to spend their money.

In Becker's Healthcare Podcast, leaders in the healthcare industry revealed what is on their minds with CFOS across the country unanimously listing inflation as a top concern. The CFO of Bellin Health in Wisconsin, James Dietsche, added that the inflationary pressures are "not only inflation pressures on labor, [but] it's inflation pressures on projects, facilities, things of that nature. And then supplies and just the reliability of those systems."

So what's driving the spike in inflation in healthcare? It's hard to pin down one root cause, but there are several contributing factors industry executives will immediately recognize and all have to do with the rise in expenses in these areas.

Labor

In their report from May 2022, KaufmannHall found that the cost of labor within healthcare increased by more than one-third since the onset of the pandemic. One main culprit seems to be contract labor. According to the same report, so far in 2022, contract labor has made up 5% of the healthcare workforce and a hefty 11% of healthcare labor expenses compared to 1% and 2%, respectively, just two years ago.

That tracks with the experience of facilities on the ground, where trained medical professionals are leaving their current positions to earn much more as contract or interim agency workers. Labor costs account for more than half of hospitals' expenses, according to the American Health Association. Making matters worse, healthcare as an industry has lost 20% to 30% of its members and is replacing them only sporadically.After adding more than 60,000 new workers in February, the industry gained less than 10,000 in March. The same cited articles show that fewer healthcare workers tend to lead to higher healthcare costs.

Prescription Drugs

The cost of prescription medications has risen dramatically, and not just due to the pandemic. Prediction drug costs have increased 2.5% since 2020 but a hefty 35% since 2014, compared to just 19% for all items and services over the same time span. Tori Marsh, director of research at GoodRx, a healthcare and telemedicine company that tracks prescription drug prices, has reported that costs for "prescription drugs are rising beyond any of the other healthcare services."

And that's not all. As reported in the Journal of the American Medical Association, the launch prices for new drugs have increased by 20% year over year, from an average of $2,115 in 2008 to an astounding $180,000 in 2021. Perhaps unsurprisingly, the United States spends more on prescription drugs on a per capita basis than virtually every other country.

Medical Supplies

Thanks in large part to increased demand and supply chain challenges, the costs of medical supplies and personal protective equipment have soared. Data from the U.S. Bureau of Labor Statistics have found a slow but steady increase in the prices of medical equipment and supplies from 2004 through 2021, with a sudden spike in 2022. The American Hospital Association found that since the onset of the Covid pandemic, medical supply expenses grew 20.6% through the end of 2021, with medical expenses for ICUs and respiratory care departments increasing 31.5% and 22.3%, respectively.

While there are many reasons behind the spike in medical supply expenses, it's worth noting that 72% of manufacturers of active pharmaceutical ingredients are located overseas, and half of the world's supply of face masks, gowns and goggles are made in China. Supply chain problems, lockdowns, backlogs, raw material scarcity, container unavailability, rising fuel costs, and logistics breakdowns have resulted in a shortage of supplies during a period of high demand — a perfect recipe for skyrocketing prices.

It's one thing to be aware of the effects of inflation as a healthcare executive; it's another to do something about it.

Previously published on Newsweek.