While the price of groceries, energy and other goods and services have surged alongside record-high inflation this year, the healthcare sector has been mostly immune to immediate price increases. That immunity is starting to wane, industry experts say.

Overall U.S. consumer prices climbed 8.5% in July from a year prior as the consumer price index hit a four-decade high, but medical care expenses increased just 4.8% in the same period, according to a tracker from the Kaiser Family Foundation and Peterson Center. 

That’s due to the unique way the industry operates, as hospitals and doctors provide care then get reimbursed from insurers. Payers set rates prospectively, meaning it will take years for high inflation to be fully reflected in healthcare costs.

Still, that expected lag already is strapping providers financially with heightened expenses they’re not yet able to recoup.

Providers are the first part of the industry to face the impacts of inflation as they spend more on supplies, equipment and labor. 

Labor expenses have been a recurring obstacle throughout the pandemic as burned-out staff have quit their jobs to take higher-paying traveling roles or retire, spurring widespread recruitment and retention issues.

“Whether you’re a private practice or hospital group, you’re competing with each other for employees,” said Scott Hines, chief quality officer at Crystal Run Health, a physician-owned multispecialty group with 17 practice sites located in New York’s lower Hudson Valley.

Despite boosting salaries, shortages of MRI and ultrasound technicians caused Hines’ group to shut down imaging services at certain sites for days at a time over the summer, he said.

“Then you add on to that the cost of everything from test tubes to medications to office supplies are all going up,” he said.

On a recent weekend the group was forced to shut an urgent care site because of a lack of staff.

Payer, provider contracts

Once providers are more adequately reimbursed, payers will attempt to pass cost increases onto employers and consumers, potentially making medical coverage more expensive, according to industry observers.

“But that is really the big question — how much of that cost can get transferred on, and how quickly can that happen,” said Eric Jordahl, managing director at healthcare management and consulting firm Kaufman Hall. 

Because payers set rates prospectively, it can take years for renegotiated contracts to more fully reflect inflation costs in healthcare. In addition, because providers set multiyear contracts, they aren’t able to quickly change the rate that insurers pay them back.

Contracts between providers and commercial payers typically last three years, meaning it will take about that time for all existing contracts to be renegotiated, according to Aneesh Krishna, a partner at consulting firm Mckinsey.

Commercial payers historically agree to 2% to 3% rate increases, though jumps between 4% and 5% could happen in new contracts, Krishna said.

While contracts expire and payers slowly adjust rates, insurers will attempt to pass some of those cost increases on to employers and consumers and they’ve already started to do so, Krishna added.

However, some hospitals already are struggling to negotiate higher contract rates with insurers.

Mike Slubowski, COO and president of Trinity Health, an 88-hospital nonprofit system spanning 25 states, said on a call Sept. 15 with the American Hospital Association that payers aren’t factoring inflation and labor shortage costs into contracts. 

“We’re a large system and we’re getting 2% to 3%,” Slubowski said. “And some of those contracts have been locked in for a few years and they won’t reopen them.”