By Dana Jacoby
The figures are in, and they don’t make for inspiring reading. Inflation in the US hit 7.9% in the first quarter of 2022, the highest rate the country has seen in four decades. While this price surge is already evident at gas stations and grocery stores, it won’t be long before it’s equally visible in the healthcare industry.
Although prices may be rising in healthcare, they’re not accelerating quite as dramatically as they are in the rest of the economy — at least, not yet. With treatment prices, reimbursement rates, and labor contracts often determined a number of years in advance, the healthcare industry is facing higher costs while being unable — at least immediately — to pass those costs on to the consumer. That said, you can be sure they’re coming.
The Current Healthcare Landscape
Before we look at how these dramatic price rises will impact healthcare, it’s important to understand the ins and outs of the US healthcare industry.
With a total of $4.1 trillion — or $12,530 per capita — having been spent on healthcare in 2020 alone, the US has the most expensive healthcare system in the world. It’s a system funded in two main ways: government-backed programs like Medicare and Medicaid, which make up 37% of US healthcare spending, and private health insurance, which comes in a close second at 34%.
However, while overall inflation in the healthcare sector has been running at an average of 2.4%, government-backed program spending has only increased by around 1% to 2%, creating a shortfall. Although government spending may have increased significantly during COVID-19, with the resultant rise in demand for medical services, hospitals, consultants, and pharmaceutical companies simply put up their prices accordingly.
This consistent shortfall means that many services being used by Medicaid and Medicare patients are not being fully reimbursed to hospitals. To account for this, the difference is being passed onto private health insurance companies, with insurance companies paying on average of 22% more for the same services that government-backed patients receive.
An Inflationary Tsunami
With the substantial price rises that the healthcare industry is experiencing, insurance premiums are increasing dramatically, making them less affordable, with costs for the uninsured rising in a similar fashion. Many insurance companies are seeking to mitigate the situation further by limiting the number of medical procedures that they cover, significantly reducing hospital revenue in the process.
To make matters worse, staff shortages in the industry mean that healthcare providers are having to pay from 20% to 30% more in wages in order to attract the employees they need. It’s a troubling state of affairs that the healthcare industry is attempting to solve in a number of ways.
Beating the Price Hikes
The first strategy that medical practices are employing is a thorough review of their best payers. Unfortunately, insurance companies have gained a lamentable reputation in recent years for not only paying reduced rates for treatments but also for reducing these rates without any warning — although insurance companies may be in the health business, it’s their own financial health that’s their prime driving concern.
With medical practices having to soak up these losses, they’re steering their services towards their most reliable payers. By calculating mean cost per patient as a function of treatment costs and allowable rates, insurance companies that aren’t making the payment grade are having to renegotiate their terms or risk being removed from a medical practice’s list of accepted insurance companies.
Along with this optimization of insurance performers, medical practices are increasingly attempting to save money by outsourcing their staff, particularly when it comes to administrative roles. Why compete in the competitive job market for someone to manage your practice’s billing, credentialing, or recruiting when there are third-party agencies that can handle these roles for you at a fraction of the cost of a full-time employee?
As mentioned before, medical practices tend to set their price structures a few years in advance, making it difficult for them to simply put up their bills. As a result, practices are learning how to work smarter and more efficiently. Fundamental to this is the renegotiation of their reimbursement rates with insurance companies. By adding an inflation adjustment every year, practices don’t need to get caught in an ongoing inflationary gap.
That said, insurance companies are well-versed in negotiation tactics and often use these opportunities as an excuse to lower payment rates even further. Medical practices are therefore having to sharpen their business skills to get the results they want.
Furthermore, practices are having to become much more efficient at payment collections in general. With the industry averaging a 96% collection rate, practices that are receiving less than that have to address the reasons for this. While insurance companies may not make any kinds of payment easy, patients often have policy deductibles that they make a habit of not paying upfront — or in many cases, ever.
Care vs Business
Certainly, for independent medical practices, the inflationary economy has thrown a large spanner in the works. Although practices may wish to uphold principles of care above all else, if they also want to remain independent, they have to change their business models and overall philosophy. By cutting costs wherever they can, engaging in hard-line negotiation tactics, and ensuring that patients pay the deductibles they’re supposed to, practices are placing themselves on a far more business-like footing in a bid to weather the inflationary storm.
Whether this will be a temporary shift in outlook or a long-term one, we shall see.