With the latest Bureau of Labor Statistics’ Consumer Price Index (CPI) report revealing the 12-month inflation rate in April 2023 rose again after hitting a recent low in March, we’re using this week’s graphic to show the cumulative picture on price and consumer sentiment changes across the last five years.
Since 2018, the CPI for all goods has risen 21 percent, while medical services have become 15 percent more expensive, in terms of consumer out-of-pocket spending. Leading into COVID, medical service prices were rising faster than general inflation, but the cumulative rise in the price of all goods caught up to medical services in early 2022.
Since December of last year, the price of medical services has actually experienced some deflation, partly due to a lagging decline in insurer profits. Reports of easing inflation had elicited a slight rebound in consumer sentiment, but last month’s 9 percent drop, the largest since June 2022, suggests this confidence is easily shaken.
Unfortunately for healthcare providers, according to a recent poll, fewer consumers worrying about elevated grocery and gas prices means that healthcare has reclaimed the top spot for household financial concerns.
The labor market added 253,000 payrolls in April, while the unemployment rate dipped to 3.4% — a historically low level.
Why it matters:
Job growth continued to boom last month, the latest sign that economy has strong momentum despite recent bank failures.
Economists expected a gain of 185,000 jobs last month.
Details:
The April job figures are a pickup from the 165,000 jobs added the previous month, which were revised down by 71,000, the Labor Department said on Friday.
The Labor Department said that jobs growth in the previous two months was lower than first estimated: jobs growth was revised down by a combined 149,000 for February and March.
The big picture:
In recent months, more Americans have joined the workforce, helping to ease labor force shortages.
The labor force participation rate — or the share of workers employed or looking for work — held at 62.6% in April.
Average hourly earnings, a measure of wage growth, rose to 0.5% in March. Wages rose 4.4% from the same time last year.
But Fed Chair Jerome Powell said this week that there were signs that the workforce was “coming back into better balance,” though it remained “very tight.”
Inflation moderated notably in March as a decline in gas prices helped to pave the way for the slowest pickup in prices in nearly two years, providing relief for many American consumers and a positive talking point for President Biden.
The Consumer Price Index climbed 5 percent in the year through March, down from 6 percent in February. That marked the slowest pace since May 2021.
Still, the details of the report underlined that inflation retains concerning staying power under the surface: A so-called core index that aims to get a clearer sense of price trends by stripping out food and fuel costs, both of which can be volatile, picked up by 5.6 percent from a year earlier. That was up slightly from February’s 5.5 percent increase, and it marked the first acceleration in the yearly number since September.
The mixed signals in the fresh inflation data — which, taken as a whole, suggested that price increases are meaningfully moderating but the progress remains gradual — come at a challenging economic moment for the Federal Reserve. The central bank is the government’s main inflation fighter, and it has been trying to wrestle price increases back under control for slightly more than a year, raising interest rates to nearly 5 percent from near zero as recently as March 2022 to slow the economy and weigh down costs.
Officials are now assessing how their policy changes are working, and they are trying to gauge how much more they need to do to ensure that price increases come fully under control. Inflation has been slowing after peaking at about 9 percent last summer, but the process has been a slow one. It remains a long way back to the 2 percent inflation that was normal before the onset of the pandemic in 2020.
Uncertainty over how quickly and completely price increases will cool is being compounded by recent developments. A series of high-profile bank blowups last month could slow the economy, but it is unclear by how much. Some Fed officials are urging caution in light of the turmoil, even as others warn that the central bank should keep its foot on the economic brake and remain focused on its fight against rising prices.
The new data “solidifies the case for the Fed to do another hike in May, and to proceed cautiously from here,” said Blerina Uruci, chief U.S. economist at T. Rowe Price, later adding that “it will take time to bring inflation down.”
Fed officials target 2 percent inflation, which they define using a different index: the Personal Consumption Expenditures measure, which uses some data from the consumer price measure but is calculated differently and released a few weeks later. That measure has also been sharply elevated.
While Wednesday’s report showed an uptick in core inflation on an annual basis — one that economists had largely expected — Ms. Uruci said that it also offered some encouraging signs. The core inflation measure slowed slightly on a monthly basis, when the March figures were compared to those in February.
And a few important services prices, which the Fed is watching closely for a sense of whether price increases are poised to fade, cooled notably. Rent of primary residences picked up 0.5 percent compared to the prior month, down from 0.8 percent in the previous reading, for instance. Housing inflation broadly is expected to slow in 2023, and that appears to be starting to take hold.
“There are signs in the details to suggest we’re making some progress toward slowing inflation,” Ms. Uruci said. “It’s not where it needs to be, but it’s progress.”
But those hopeful signs do not mean that inflation will fade smoothly and rapidly. The slowdown in the overall index, for instance, may not last: A big chunk of the decline is owed to a drop in gas prices that may not be sustained.
And a few other indexes continued to show quick price increases, including new vehicles and hotel rooms.
As they try to bring inflation to heel, some central bankers have suggested that they may need to further raise interest rates.
The Fed’s latest estimates, released shortly after the collapse of Silicon Valley Bank and Signature Bank in March, suggested that officials could lift rates another quarter-point this year, to just above 5 percent. The central bank will announce its next policy decision on May 3.
On Tuesday, John C. Williams, the president of the Federal Reserve Bank of New York, said that the Fed had more work to do in bringing down price increases and suggested that the central bank’s March forecast for one more quarter-point rate move was still a “reasonable starting place.”
But Austan D. Goolsbee, the president of the Federal Reserve Bank of Chicago, suggested that recent bank failures could make it tougher for businesses and consumers to access credit, slowing the economy, stoking uncertainty and creating a “need to be cautious.”
“We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation,” Mr. Goolsbee said.
Higher interest rates have made it much more expensive to borrow money to buy a house or expand a business. That is slowing economic activity. As demand cools and the labor market softens, wage growth is also moderating.
That could help to pave the way for cooler inflation. When wages are climbing quickly, companies might charge more to try to cover their labor bills, and their customers are likely to be able to afford the steeper prices. But as households become more strapped for cash, it could become harder for businesses to raise prices without scaring away shoppers.
With input from stakeholders across the industry, Modern Healthcare outlines six challenges health care is likely to face in 2023—and what leaders can do about them.
1. Financial difficulties
In 2023, health systems will likely continue to face financial difficulties due to ongoing staffing problems, reduced patient volumes, and rising inflation.
According to Tina Wheeler, U.S. health care leader at Deloitte, hospitals can expect wage growth to continue to increase even as they try to contain labor costs. They can also expect expenses, including for supplies and pharmaceuticals, to remain elevated.
Health systems are also no longer able to rely on federal Covid-19 relief funding to offset some of these rising costs. Cuts to Medicare reimbursement rates could also negatively impact revenue.
“You’re going to have all these forces that are counterproductive that you’re going to have to navigate,” Wheeler said.
In addition, Erik Swanson, SVP of data and analytics at Kaufman Hall, said the continued shift to outpatient care will likely affect hospitals’ profit margins.
“The reality is … those sites of care in many cases tend to be lower-cost ways of delivering care, so ultimately it could be beneficial to health systems as a whole, but only for those systems that are able to offer those services and have that footprint,” he said.
2. Health system mergers
Although hospital transactions have slowed in the last few years, market watchers say mergers are expected to rebound as health systems aim to spread their growing expenses over larger organizations and increase their bargaining leverage with insurers.
“There is going to be some organizational soul-searching for some health systems that might force them to affiliate, even though they prefer not to,” said Patrick Cross, a partner at Faegre Drinker Biddle & Reath. “Health systems are soliciting partners, not because they are on the verge of bankruptcy, but because they are looking at their crystal ball and not seeing an easy road ahead.”
Financial challenges may also lead more physician practices to join health systems, private-equity groups, larger practices, or insurance companies.
“Many independent physicians are really struggling with their ability to maintain their independence,” said Joshua Kaye, chair of U.S. health care practice at DLA Piper. “There will be a fair amount of deal activity. The question will be more about the size and specialty of the practices that will be part of the next consolidation wave.”
3. Recruiting and retaining staff
According to data from Fitch Ratings, health care job openings reached an all-time high of 9.2% in September 2022—more than double the average rate of 4.2% between 2010 and 2019. With this trend likely to continue, organizations will need to find effective ways to recruit and retain workers.
Currently, some organizations are upgrading their processes and technology to hire people more quickly. They are also creating service-level agreements between recruiting and hiring teams to ensure interviews are scheduled within 48 hours or decisions are made within 24 hours.
Eric Burch, executive principal of operations and workforce services at Vizient, also predicted that there will be a continued need for contract labors, so health systems will need to consider travel nurses in their staffing plans.
“It’s really important to approach contract labor vendors as a strategic partner,” Burch said. “So when you need the staff, it’s a partnership and they’re able to help you get to your goals, versus suddenly reaching out to them and they don’t know your needs when you’re in crisis.”
When it comes to retention, Tochi Iroku-Malize, president of the American Academy of Family Physicians (AAFP), said health systems are adequately compensated for their work and have enough staff to alleviate potential burnout.
AAFP also supports legislation to streamline prior authorization in the Medicare Advantage program and avoid additional cuts to Medicare payments, which will help physicians provide care to patients with less stress.
4. Payer-provider contract disputes
A potential recession, along with the ensuing job cuts that typically follow, would limit insurers’ commercial business, which is their most profitable product line. Instead, many people who lose their jobs will likely sign up for Medicaid plans, which is much less profitable.
Because of increased labor, supply, and infrastructure costs, Brad Ellis, senior director at Fitch Ratings, said providers could pressure insurers into increasing the amount they pay for services. This will lead insurers to passing these increased costs onto members’ premiums.
Currently, Ellis said insurers are keeping an eye on how legislators finalize rules to implement the No Surprise Act’s independent resolution process. Regulators will also begin issuing fines for payers who are not in compliance with the law’s price transparency requirement.
5. Investment in digital health
Much like 2022, investment in digital health is likely to remain strong but subdued in 2023.
“You’ll continue to see layoffs, and startup funding is going to be hard to come by,” said Russell Glass, CEO of Headspace Health.
However, investors and health care leaders say they expect a strong market for digital health technology, such as tools for revenue cycle management and hospital-at-home programs.
According to Julian Pham, founding and managing partner at Third Culture Capital, he expects corporations such as CVS Health to continue to invest in health tech companies and for there to be more digital health mergers and acquisitions overall.
In addition, he predicted that investors, pharmaceutical companies, and insurers will show more interest in digital therapeutics, which are software applications prescribed by clinicians.
“As a physician, I’ve always dreamed of a future where I could prescribe an app,” Pham said. “Is it the right time? Time will tell. A lot needs to happen in digital therapeutics and it’s going to be hard.”
6. Health equity efforts
This year, CMS will continue rolling out new health equity initiatives and quality measurements for providers and insurers who serve marketplace, Medicare, and Medicaid beneficiaries. Some new quality measures include maternal health, opioid related adverse events, and social need/risk factor screenings.
CMS, the Joint Commission, and the National Committee for Quality Assurance are also partnering together to establish standards for health equity and data collection.
In addition, HHS is slated to restore a rule under the Affordable Care Act that prohibits discrimination based on a person’s gender identity or sexual orientation. According to experts, this rule may conflict with recently passed state laws that ban gender-affirming care for minors.
“It’s something that’s going to bear out in the courts and will likely lack clarity. We’ll see differences in what different courts decide,” said Lindsey Dawson, associate director of HIV policy and director of LGBTQ health policy at the Kaiser Family Foundation. “The Supreme Court acknowledged that there was this tension. So it’s an important place to watch and understand better moving forward.”
The healthcare sector has been navigating an intransigent staffing crisis since the widespread layoffs during the first few months of COVID. The graphic above uses Bureau of Labor Statistics data to illustrate the impact of this labor shock on both total employment and employee compensation.
Across key healthcare settings, workplaces with the slowest recovery of total workers have seen the largest increases in employee earnings.Hospital employment largely tracked with the rest of the private sector; however, hospitals raised employee compensation by two percent more than the private sector, while recovering two percent fewer jobs.
It is important to note that the relationship between employment levels and employee compensation is not causal, as evidenced by the ongoing labor shortages in nursing facilities, despite boosting average pay over 20 percent. Rather, the data suggest that, for as long as the tight labor market persists,pay raises alone are not sufficient to recruit and retain talent. Plus, while inflation may be abating, it has still outpaced earnings growth since December 2021.
Given that many healthcare workers saw pay bumps early in the pandemic, some are left still feeling underpaid, even if their compensation over the past three years has more than kept pace with inflation.
The U.S. economy added 517,000 jobs in January, and the unemployment rate fell to 3.4% — the lowest level in over a half-century, the government said on Friday.
Why it matters:
Employers added jobs at an unexpectedly rapid pace, the latest sign of a hot labor market despite aggressive moves by the Federal Reserve to cool it down.
The numbers are more than double the 190,000 forecasters anticipated.
Details:
The extraordinary reportcomes as the Fed continues to dial back its pace of interest rates and prepares to raise rates further to restrain the economy and chill still-high inflation.
Fed chair Jerome Powell has acknowledged progress on slowing inflation in recent months while noting risks lie ahead. Among them is wage growth, which is rising at a pace still too swift for the Fed’s comfort.
In January, average hourly earnings rose 0.3% — or 4.4% over the previous year, according to Friday’s data.
The big picture:
The data also showed that employment in 2023 was even stronger than initially thought, with roughly 568,000 more jobs than previously reported.
The update was part of the Labor Department’s annual revisions, which incorporate more complete data from insurance records and updated seasonal adjustments.
The U.S. economy grew at an annualized 2.9% rate in the final months of 2022, the Commerce Department said on Thursday.
Why it matters:
Economists are bracing for a significant slowdown in economic activity as the Federal Reserve’s interest rates hikes take hold, but that certainly wasn’t the case in the final months of last year.
Economists expected the Gross Domestic Product figures to show the economy grew at a 2.6% annualized rate last quarter, after expanding at a 3.2% pace in the prior quarter.
Details:
Consumer spending and businesses built up private inventories gave GDP the biggest boost. Among the biggest drags: fixed investment, a category that includes housing.
By the numbers:
Over the calendar year, GDP grew by 2.1% in 2022 — a decent pace, especially considering the historically aggressive rate hikes by the Federal Reserve that sought to restrain economic activity to contain inflation.
Those rate hikes hit the housing sector particularly hard, which dragged down overall growth earlier last year.
Catch up quick:
The first half of 2022 was dogged by fears that the economy had entered a recession, after back-to-back quarters of contractions. But by the second half of the year, the economy had returned to growth mode.
The growth over 2022 was an expected slowdown from the 5.9% achieved in 2021, when the economy bounced back from the pandemic shock.
In our decades of working in healthcare, we’ve never seen a time when payer-provider negotiations have been more tense. Emboldened insurers, having seen strong growth during the pandemic, are entering contract negotiations with an aggressive posture.
“They weren’t even willing to discuss a rate increase,” one CFO shared as he described his health system’s recent negotiations with a large national insurer. “The plan’s opening salvo was a fifteen percent rate cut!”
Health systems are feeling lucky to get even a two or three percent rate bump, well short of the historical average of seven percent—and far short of what would be needed to account for skyrocketing labor, supply, and drug costs. According to executives we work with, efforts to describe the current labor crisis and resulting cost impacts with payers are largely falling on deaf ears.
This scenario is playing out in markets across the country, with more insurers and health systems announcing that they are “terming” their contract, publicly stating they will cut ties should the stalemate in negotiations persist.
Speaking off the record, a system executive shared how this played out for them. With negotiations at an impasse, a large insurer began the process of notifying beneficiaries that the system would soon be out-of-network, and patients would be reassigned to new primary care providers. The health plan assumed that the other systems in the market would see this as a growth opportunity—and was shocked when they discovered that other providers were already operating at capacity, unable to accommodate additional patients from the “terminated” system.
Mounting concerns about access brought the plan back to the table. Even in the best of times, a major insurer cutting ties with a health system is extremely disruptive for consumers, who must shift their care to new providers or pay out-of-network rates. But given current capacity challenges in hospitals nationwide, major network disruptions can be even more dire for patients—and may force payers and providers to walk back from the brink of contract termination.
After COVID fears and shutdowns led consumers to delay care early in the pandemic, persistently high inflation over the past year has further suppressed volumes.
As the graphic above illustrates, the average deductible for individual coverage has grown by over 140 percent since 2010, exposing consumers to an increasing portion of healthcare costs, and prompting economists to reevaluate the adage that healthcare is “recession-proof”.
This year, that trend collided with an inflation spike that outpaced wage gains by two percent. Faced with diminished purchasing power, households are making budget tradeoffs which explicitly pit healthcare against other essential household needs.
For some, this cost-cutting impulse even extends to preventative screenings—required to be covered without cost-sharing—when consumers’ financial concerns drive them to avoid healthcare altogether.
While the latest inflation report suggests price increases are moderating, fears of a broader recession persist, making it critical for health systems and physicians to communicate with patients, encouraging them to continue to access preventive care, educating them about lower cost care options, and helping them prioritize treatment that should not be put off.
It may be time to update your inflation narrative.
The ultra-hot readings that defined the first half of 2022 appear to be firmly in the rearview mirror, improving the odds that price pressures can dissipate further without excessive economic pain.
That’s the key takeaway from the December Consumer Price Index released this morning, which confirmed notably cooler inflation as the year came to a close.
Why it matters:
The nation’s inflation problem isn’t over, but so far inflation is slowing while the job market is still healthy, an enviable combination.
As Princeton economist Alan Blinder put it in an op-ed last week, inflation was “vastly lower” in the second half of 2022 than the first; yet, “hardly anyone seems to have noticed.”
By the numbers:
In the final three months of 2022, core inflation (which excludes food and fuel costs) came in at an annualized 3.1% — higher than the Fed aims for, but hardly crisis levels. In the second quarter of the year, that number was 7.9%.
It’s a stunning decline, occurring alongside a labor market that by nearly all measures is still flourishing. Just this morning, the Labor Department announced that jobless claims fell to an ultra-low 205,000 last week.
State of play:
Grocery prices rose 1.1% in the final three months of the year, an uncomfortably high rate, but not as extreme as the rates seen earlier in 2022.
Gasoline prices, pushed up by Russia’s invasion of Ukraine, were once the crucial reason why inflation was rising. In recent months, the opposite has been true: December pump prices slid 9.4%, helping drag the overall index into negative territory.
Disinflation was at work for many other goods, including used cars (-2.5%) and new vehicles (-0.1%) where prices have reversed, helped by easing supply chain bottlenecks.
Shelter costs pushed inflation upward, surging 0.8% in December. But private-sector data points to rents on new leases falling in recent months, which would only filter into the CPI data over time. That makes for a more benign inflation outlook in 2023.
What to watch:
That’s not to say there aren’t risks ahead. The war in Ukraine is ongoing, and another energy price shock could occur.
The Fed has also focused in on the services sector, where price increases have slowed from last summer but remain frothy. The risk is that business costs associated with the still-tight labor market (like higher wages) will pass through to prices for consumers.
The bottom line:
Inflation will still be a worry in 2023, but much less so than it seemed a few months ago.
HENRY KOTULA 