Inflation – The Health Care Blog

Last in Line: Hospitals Brace for a Chilly 2023

Feb 23, 2023• 2

BY JEFF GOLDSMITH

As they emerge from the COVID pandemic, US hospitals have a terrible case of Long COVID. They experienced the worst financial performance in 2022 in this analyst’s 47 year memory. As the nation recovers from the worst inflation in forty years, hospitals will find themselves locked in conflict with health insurers over contract renewals that would reset their rates to the actual delivered cost of care. “Last in line” in the US battle with inflation, hospitals will be exposed to public criticism when they attempt to recover from pandemic-induced financial losses.

Hospital payment rates for commercial payers are backward looking. Commercial insurance contracts between hospitals and health insurers were multi-year contracts negotiated before the pandemic. They continued in force during the pandemic, despite explosive rises in people and materials costs. As a consequence, health costs were conspicuously missing from the main drivers of the 2021-22 inflation surge– food, housing, energy, durable goods, etc.

Hospitals’ operating costs blew up during COVID due to a shortage of clinicians, the predations of temporary staff agencies, shortages of supplies and drugs and crippling cyberattacks that disabled their IT systems. Hospital losses worsened during 2022 because they are unable to place patients who are no longer acutely ill but who cannot be placed in long term, psychiatric or home-based care (a problem shared by Britain’s disintegrating National Health Service). Thousands of patients are stuck in limbo in hospital “observation” units, for which government and commercial payers do not compensate them adequately or at all.

Is Health Industry Price Inflation Really At a Historical Low?

Aug 2, 2013• 15

By Jeff Goldsmith

One hesitates to make too much of a single report, but the Altarum Institute’s July Report, “Health Care Price Growth at 20+ Year Low,” certainly commands one’s attention. According to Altarum’s analysis, the health sector pricing trend ran at a 1.0 percent annual rate in May 2013, lowest since January of 1990. What is striking about Altarum’s health care pricing trendline is that it has declined for the last three years in spite of an alleged economic recovery.

It also runs parallel to a subsiding utilization trend, suggesting that the health sector has been unable to offset reduced utilization with price increases. Since the beginning of the recession, pricing has subsided from double the rate of the GDP deflator to parity, and it has closely tracked the deflator with only two deviations for more than eight years. Clearly, something more than the recession is at work here.

These trendlines confirm what this observer sees from his contacts in multiple sectors of the health industry: a widespread and durable “top line flu”. The growth in enterprise revenue for most health providers and manufacturers has been static (e.g. very low single digits or actually declining) over the last two years. Most investor-owned hospitals, pharmaceutical companies, device manufacturers, and physician practices (pretty much everyone except the consultants and IT vendors) have reported both revenue stasis and earnings compression.

My economist friends point to rising consumer copayments as inhibiting price increases. The Kaiser Family Foundation has reported almost a quadrupling of the number of covered workers in high deductible health plans (from 5 percent to 19 percent) since the end of the recession. It is also possible that a disinflationary mindset has inhibited providers and suppliers from seeking outsized price increases to compensate for lost sales volume. For suppliers, the marked decline of “physician preference” marketing has also hurt both sales and margins.

Hospital pricing. Performance of hospital prices will provide more fodder for those concerned about hospital consolidation pushing prices up. On the one hand, overall hospital prices rose an annualized 1.8 percent for May 2013, fractionally higher than the consumer price index (CPI) at 1.4 percent. However, when one strips out the “administered price” portion (Medicaid and Medicare), hospital prices to privately insured patients rose 4.8 percent annualized in May, nearly five times rate of health prices as a whole. Altarum suggests that cost shifting might explain this significant disparity. However, even this increase to private patients was not enough to raise overall health costs significantly.

Government payment to hospitals has trended lower for multiple reasons. Many state Medicaid plans have cut hospital rates in the past several years to help balance state budgets. And in addition to the ACA’s mandated reductions in hospitals’ disproportionate share payments and DRG updates, the sequester took a significant further bite out of DRG payments during the winter.

Since most hospital contracts with private insurers are multi-year, it’s difficult to argue that compensating upward revisions in private health insurance contract rates would yet be reflected in national economic statistics. Moreover, not all hospitals are part of systems capable of exerting pricing power on private health plans. Have-not hospitals have had their prices constrained by payer contracts, compensating for the effect of leverage by market hegemons. We’ll have more evidence in a year to confirm or disconfirm the cost shifting/pricing power hypothesis.

There’s another indicator of a tougher hospital pricing environment. According to the Advisory Board’s Dan Diamond, hospital employment has actually contracted in one-quarter of the monthly jobs reports from the Bureau of Labor Statistics since January 2009, including a 6000 person force reduction in May, 2013. On balance, hospital executives would much rather raise rates than lay off staff, so the fact that the nearly unbroken decades-long expansion of hospital headcounts is faltering suggests a very difficult pricing environment for hospital services.

The Most Powerful Health Care Group You’ve Never Heard Of

Aug 8, 2012• 17

By Brian Klepper and Paul Fischer

Excessive health care spending is overwhelming America’s economy, but the subtler truth is that this excess has been largely facilitated by subjugating primary care. A wealth of evidence shows that empowered primary care results in better outcomes at lower cost. Other developed nations have heeded this truth. But US payment policy has undervalued primary care while favoring specialists. The result has been spotty health quality, with costs that are double those in other industrialized countries. How did this happen, and what can we do about it.

American primary care physicians make about half what the average specialist takes home, so only the most idealistic medical students now choose primary care. Over a 30 year career, the average specialist will earn about $3.5 million more. Orthopedic surgeons will make $10 million more. Despite this pay difference, the volume, complexity and risk of primary care work has increased over time. Primary care office visits have, on average, shrunk from 20 minutes to 10 or less, and the next patient could have any disease, presenting in any way.

By contrast, specialists’ work most often has a narrower, repetitive focus, but with richer financial rewards. Ophthalmologists may line up 25 cataract operations at a time, earning 12.5 times a primary care doctor’s hourly rate for what may be less challenging or risky work.