January 31, 2023

Medicare’s forecast for the current fiscal year assumed hospital costs would increase by about 2.7 percent, when in reality those costs are on track to increase by more than 5 percent. While this problem isn’t unique to Medicare, the massive program follows a set schedule with long delays and has been slow to adapt.

The latest monthly update of the consumer price index released on Wednesday continues to show headline inflation near a 40-year high, with prices rising 8.5 percent in the past 12 months. That elevated level is driven by double-digit growth for items like gas, food and vehicles.

By contrast, consumer medical care prices have risen more slowly at 5.1 percent, with much of the increase attributed to higher profits for private insurers. Prices for healthcare supplies — a category that includes items like prescription drugs and wheelchairs — have risen even more slowly over the past 12 months, at just 3.7 percent. And because of the way the widely tracked CPI is calculated, there’s a delay of at least 10 months when drug and device price hikes show up.

“If you looked at the best measures of inflation in healthcare, you wouldn’t know that something unusual is going on right now, which is clearly in stark contrast to the economy as a whole,” said senior fellow Matthew Fiedler at the USC. – Brookings Schaeffer Health Policy Initiative, told POLITICO.

While consumers benefit from lower medical prices in the short term, many healthcare providers are seeing their balance sheets strained by rising costs.

“We are dealing with very significant increases in input prices that are directly related to inflation, much of it being driven by the labor side,” said Richard Pollack, president and CEO of the American Hospital Association, in an interview. “Hospitals are experiencing quite significant reductions in their operating margins, if you look at the numbers we’re grappling with.”

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Acute staff shortages due to the Covid-19 pandemic have pushed up wages, but providers are now also faced with a tighter labor market overall that has forced every sector to compete for scarce labor.

In addition to staff, which account for more than half the budget of an average hospital, facilities are also feeling the effect of inflation on supplies, medicines, food and energy, Pollack said.

Providers are also grappling with the return of cuts to the cuts that were temporarily interrupted during the pandemic, cutting Medicare rates by another 2 percentage points.

The losses of providers are the profit of the consumer for the time being. When Medicare pays less for health services, that can translate into lower premiums and cost-sharing for program beneficiaries. And the private sector often follows in the footsteps of what Medicare, the nation’s largest provider of health services, is doing.

“I think it’s very possible that this will end up being a good thing. I understand why hospitals might not like it, but from a tax and patient standpoint it certainly has a lot of features,” said Fiedler.

On the other hand, provider groups say low payment rates and staff shortages reduce access to care when facilities are forced to curtail or close their operations.

The inflationary decoupling could end soon, at least for Medicare.

The recently updated payment rule released by CMS last week projects input costs to increase by 4.1 percentage points next year, a significant boost that will translate into higher payments.

The American Health Care Association and the National Center for Assisted Living, which represent nursing homes and other long-term care facilities, praised the increase but warned the state’s Medicaid programs should follow suit.

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The AHA also welcomed the increase, but said it falls short of the group’s own estimates for the rising cost of providing hospital care.

“It’s totally inadequate,” Pollack said. “Sure, it’s an improvement from where they started and we certainly appreciate that, but there’s still a big gap.”

And because Medicare rates are based only on forward-looking projections, there is no mechanism for price catching up and last year’s underestimation will not be corrected. As a result, hospitals, nursing homes and other providers tied to the payment system will feel the gap for years to come.