Healthcare's affordability problem is about to get worse

Healthcare's current-day reality and the financing behind it are like a TV with lip sync problems. As you watch healthcare events and disruptions unfold, their effects on pocketbooks are delayed. 

2022 was a bad year for hospital and health system finances. Approximately half of U.S. hospitals finished the year with a negative operating margin, according to Kaufman Hall. Labor expenses were a constant and acute source of pressure throughout the year, with global supply chain problems and inflation adding salt to wounds and ratcheting up supply, capital and drug expenses. 

Inflation has rankled the U.S. since 2021, reaching a 40-year high in 2022 with uneven and slow declines. So far, it has worried consumers more than healthcare costs, but that is likely to change as inflation's ripple effects on healthcare catch up and are increasingly felt by its buyers. 

Normally, consumer inflation rates are slower than inflation for medical services, but the opposite was true in 2022 and 2023, according to The Peterson Center on Healthcare and KFF. 

From February 2022 to 2023, prices for all goods and services grew 6 percent, while prices for medical services increased by 2.3 percent during the same period.

"For now, inflation in the broader economy continues to outpace medical price increases," Peterson-KFF analysts wrote in March. "It remains to be seen whether, or to what extent, these recent trends will hold moving forward."

While inflated medical costs haven't been an acute problem yet, inflated prices for other goods and services still spill over to affect consumer buying behavior. That includes buying in healthcare. The number of people reporting delayed or forgone medical treatment due to cost hit a 22-year high in summer 2022, according to Gallup. 

Mike Slubowski, president and CEO of 88-hospital Trinity Health, has seen the slowdown of patient or consumer behavior firsthand. It is contributing to delays in how patient volumes have rebounded since COVID-19 throughout the 26 states Trinity serves. 

"Patient volume has been slow to return, especially for elective services. People are very price sensitive," Mr. Slubowski said. "They are concerned about the cost of care, so they have put off routine care for physicals and chronic conditions." 

Even with the inflation rate at its lowest point in about two years, 3 in 5 Americans pointed to price increases as the cause of financial hardship for their household, according to a Gallup poll conducted in April. Inflation weighed most heavily on respondents' minds, with 35 percent citing it as the most important financial problem facing their family — far exceeding healthcare costs (4 percent) at the time. 

While demand for routine care is lower than pre-pandemic levels, some other types of care are rebounding after delays brought by COVID-19. UnitedHealthcare on June 15 reported increased demand from patients in Medicare health plans, particularly related to knee and hip surgeries. The pattern is driving up costs for the insurer, it said. The comments resulted in a sharp drop to health insurer stocks. On June 16, Humana issued its own warning sign about rising medical costs, citing an increase in "emergency room, outpatient surgeries and dental services, as well as inpatient trends that have been stronger than anticipated in recent weeks, diverging from historical seasonality patterns."

In addition to consumers rethinking their purchases and financial decisions, inflation combined with nationwide labor shortages have heightened wage pressures. To Marvin O'Quinn, president and COO of Chicago-based CommonSpirit, the most significant effect of inflation has been the rapidly increasing salary and benefit structures across the healthcare industry. 

"The ultimate impact here is it will drive up the overall cost of care. There's no avoiding that," Mr. O'Quinn said. "As the unit cost goes up, that cost at some point is going to have to be passed on. The organization can't survive if you aren't able to create enough revenue to sustain the organization financially, meet its capital needs, and pay all of its debts. Eventually the cost of care, I think, is going to go up." 

Health systems' financial pressures are showing up in reimbursement rate and contract negotiations, as they look to pass on some cost increases to the commercial insurers to subsidize governmental reimbursement rates. While overall hospital expenses increased by 17.5 percent from 2019 to 2022, Medicare reimbursement increased 7.5 percent in the same timeframe, according to data from consulting firm Syntellis Performance Solutions.

As more hospitals look to renegotiate higher commercial rates, the impact will play out among private health insurance premiums.

"Cost pressures are being addressed in ongoing provider contracting negotiations, and we expect them to begin to emerge in reimbursement rates and follow through into premium rate increases over the next few years," Fitch analysts wrote in June. "The result is expected to be heightened public discourse around healthcare costs for consumers."

The nation's largest payers were mostly insulated in 2022 from the cost pressures facing hospitals, and the industry posted stable financial results in the first quarter of 2023. Despite that, Fitch analysts warned that payers should expect more attention over the next few years around rising healthcare costs because of ongoing contract negotiations with providers and subsequent premium rate increases.

A majority of the time, the details of contract negotiations between payers and health systems remain behind closed doors, but disputes spill into the public eye when one or both sides believes attention from patients or the media will garner more satisfactory results.

"Negotiating new agreements with healthcare systems is a standard part of our business," Premera Blue Cross said in May while negotiating a new contract with Seattle-based UW Medicine. "Negotiations are usually done out of the public eye, though, because we understand news like this is disruptive and causes unnecessary angst and confusion for our members."

Despite the potential for confusion among patients and members, a commercial crunch at Bon Secours Mercy Health has recently resulted in intense accusations between the Cincinnati-based health system and several Anthem Blue Cross Blue Shield plans.

In addition to uncompetitive commercial rates, BSMH alleges that Anthem has racked up more than $100 million in late and unpaid claims and discontinued current contract negotiations. In response, Anthem said BSMH terminated the current contract, even though it runs through 2024. The payer also claimed that BSMH has threatened to stop accepting Anthem's Medicaid or Medicare members in Ohio, Kentucky and Virginia unless the payer agrees to pay higher commercial rates.

"We have repeatedly requested that Bon Secours Mercy Health rescind their termination of the current contract, an action which threatens to put society's most vulnerable at risk in order to leverage higher revenues from Anthem," an Anthem BCBS spokesperson told Becker's. "If we were to agree to their requests for higher rates, on top of the reasonable increases we are already providing under the current contracts, the result would be higher costs borne directly by businesses and individuals."

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