Hospitals Are Starting To Feel the Squeeze

Slow and gradual inflation can indicate a strong, healthy, and productive economy. In fact, the Federal Reserve has been targeting a long-term inflation rate of 2% for years. However, when it spikes, as it last did at 8.6% in May 2022, its highest level in more than 40 years, inflation can be incredibly disruptive, both in terms of how businesses are run and how businesses are run also on how consumers spend their money.

On Becker’s Healthcare Podcast, healthcare industry executives revealed what’s on their minds as CFOS across the country unanimously cite inflation as their top concern. Bellin Health’s Wisconsin CFO James Dietsche added that inflationary pressures are “not just inflationary pressures on the workforce, [but] it’s inflationary pressures on projects, facilities, things of that nature. And then deliver and just the reliability of those systems.”

So what is driving the rise in healthcare inflation? It’s hard to pinpoint a root cause, but there are several contributing factors that industry executives will immediately recognize, all of which have to do with the increase in spending in these areas.

work

In its May 2022 report, KaufmannHall found that healthcare labor costs have increased by more than a third since the pandemic began. A major culprit appears to be contract labor. According to the same report, so far in 2022, contract workers accounted for 5% of healthcare workers and a whopping 11% of healthcare labor costs, down from 1% and 2%, respectively, just two years ago.

This goes hand in hand with the experience of on-site facilities where trained medical professionals are leaving their current positions to earn much more as contract or temporary workers. Labor costs account for more than half of hospital expenses, according to the American Health Association. To make matters worse, healthcare as an industry has lost 20% to 30% of its members and only sporadically replaces them. After hiring more than 60,000 new workers in February, the industry added less than 10,000 in March. The same articles cited show that fewer health workers tend to lead to higher health care costs.

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Prescription drugs

Prescription drug costs have increased dramatically, and not just because of the pandemic. The cost of predicted drugs has increased by 2.5% since 2020, but by a whopping 35% since 2014, compared to just 19% for all items and services over the same period. Tori Marsh, director of research at GoodRx, a healthcare and telemedicine company that tracks prescription drug prices, has reported that the cost of “prescription drugs is rising beyond all other healthcare services.”

And that’s not all. As reported in Journal of the American Medical AssociationIntroductory prices for new drugs are up 20% year over year, from an average of $2,115 in 2008 to a staggering $180,000 in 2021. Perhaps unsurprisingly, the United States spends more per capita on prescription drugs than virtually any other country.

Medical supplies

Thanks in large part to increased demand and supply chain challenges, the cost of medical supplies and personal protective equipment has skyrocketed. Data from the US Bureau of Labor Statistics has noted a slow but steady increase in the price of medical equipment and supplies from 2004 to 2021, with a sudden increase in 2022. The American Hospital Association noted that since the start of the Covid pandemic, medical Utility spending rose 20.6% through the end of 2021, with medical spending for ICUs and respiratory departments increasing 31.5% and 22.3%, respectively.

While there are many reasons for the increase in healthcare spending, it is worth noting that 72% of API manufacturers are overseas and half of the world’s supply of face masks, gowns and goggles is made in China. Supply chain issues, lockdowns, backlogs, raw material shortages, container unavailability, rising fuel costs and logistics failures have created supply shortages at a time of high demand – a perfect recipe for skyrocketing prices.

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It’s one thing to be aware of the impact of inflation as a healthcare leader; it is another to do something about it.

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