During the pandemic, health care costs, usually a major driver of US inflation, remained surprisingly stable, rising at only about 2% a year, even though prices for many goods and services rose more than three or four times as fast.

But there are signs that medical inflation is back as demand for non-COVID-19 related health services recovers and healthcare providers try to make up for rising labor costs and losses during the pandemic.

Prices for hospital services, the largest component of medical care, rose in December and more rapidly in January, reaching an annual rate of 5.5%, according to personal consumption data, the Federal Reserve’s preferred measure of inflation.

Unfortunately, it’s going to be a problem that’s pretty sticky in terms of consuming more and more of consumers’ pockets, said Sunit Patel, chief actuary of health and benefits at Mercer, the consulting firm.

Consumer cost increases for nursing homes were slightly higher last year at 5.7%; dental services rose even faster.

Hospitals are pushing for higher payments as their long-term contracts with health insurers are due for renewal.

And increased market concentration, caused by chains buying up smaller hospitals, is helping to drive up medical inflation, as is the historically opaque nature of health care prices.

I was very concerned that I was looking at a big jump [health insurance] premiums and out-of-pocket costs, said Glenn Melnick, an expert in health economics and finance at USC.

Until recently, health care bills weren’t much of a concern for Rex Thomas, a retired US Postal Service maintenance engineer who lives in Moreno Valley, California. They were nothing like his skyrocketing gas and grocery bills, including the 40% more he pays to feed his two Siberian huskies.

But even as inflation has come down on many things, he finds his health bills moving in the opposite direction.

At open enrollment last fall, he learned

That

his union-sponsored Cigna insurance premium would cost him 4.8% more this year, after a 3.6% increase in 2022. He switched to a different plan.

He said Loma Linda University Medical Center, his hospital of choice, was getting stricter on billing and wanted $1,500 upfront for an upper endoscopy he requested.

They priced it out of my reach, Thomas said.

A spokesperson for the hospital responded in a statement that the medical center is committed to providing our patients with clear and transparent billing practices. We strive to ensure that our billing processes are simple and efficient and that our patients understand their financial responsibilities.

About half of the country’s population is covered by employer-sponsored health insurance. In a tight labor market, many employers will be reluctant to pass on rising costs directly to their employees, who usually pay part of the premium.

But at the same time, Melnick said, employers are likely to adjust other parts of workers’ compensation, offsetting higher health care costs with smaller pay increases.

That premium is not free. It lowers your take-home pay, he said.

US households are already losing purchasing power as wage increases have failed to keep up with inflation. And many consumers struggle with medical bills, which are the largest direct debit and a factor in personal bankruptcies.

The recent increase in headline inflation came after decades of virtually stagnant prices for most goods and services. Inflation rose to a 40-year high of 9.1% last June, based on the consumer price index, and has since moderated to 6% in February. According to the Fed’s preferred measure, which covers a broader range of spending, the latest inflation reading was 5.4%

—

still well above the central bank’s 2% target.

Even as policymakers have raised interest rates to cool spending and investment to curb price increases, the nation’s inflation problem has now shifted from goods to services.

While prices for home appliances, clothing and recreational equipment have fallen from previous increases, thanks to an easing of supply and demand bottlenecks, there is little relief for consumers for services such as rent, transportation, dining out and personal care.

What makes the projected rise in medical inflation particularly worrying is that healthcare accounts for a large portion of people’s spending. And rising prices for services tend to fall more slowly than for goods, meaning the current cycle of hot inflation could extend.

Healthcare spending accounts for nearly one-fifth of the country’s economy, and the medical services component has a similarly disproportionate impact on inflation, based on personal consumption expenditure data.

On the bright side, some things may help temper the trend of rising health care costs.

Telemedicine, for example, received a big boost during the pandemic and could help reduce costs by reducing visits to doctor’s offices and providing other services remotely. The costs for doctor’s services have remained stable over the past year.

The proliferation of outpatient clinics and non-traditional places for medical care, including pharmacy chains, may also create some competitive pressure to keep prices low.

But healthcare inflation often goes hand in hand with labor costs. And the shortage of healthcare workers and the resulting increase in their wages over the past few years may only just be factored into overall medical pricing, in part because healthcare providers are locked into long-term contracts with insurers.

Health insurers usually conclude contracts of one to three years with healthcare providers. The contracts are designed to ensure lower prices for patients and predictable revenues for healthcare providers.

Since COVID-19, hospitals have been struggling with higher turnover. Many more employees retired or quit, burned out from the stress of the pandemic and

goods

frustrated with management’s response to staffing needs. Many nurses went to work as traveling nurses for considerably more money.

Caroline Burris, who lives in northeastern Nebraska, started as a traveling registered nurse in 2019. As COVID-19 hit and demand for nurses increased, her wages for a 36-hour week rose from $1,200 to more than three times that amount. It has since dropped to about $2,200. “Paying was crazy,” said the emergency room nurse.

Before the pandemic, spending on traveling nurses and other contract workers made up 10% of total hospital labor costs. It was up from 33% last year, said Erik Swanson, senior vice president of data and analytics at Kaufman Hall, a leading hospital research and consulting firm.

Adventist Health, which operates 23 hospitals and numerous clinics primarily in California, reported

That

its personnel costs increased by 11% in the nine months

leading up to the end

September 30th

compared

with the same period a year earlier. It’s a major reason why the Roseville, California-based company lost $254 million in those nine months.

Demand for health care workers is still very high, said Matthew Notowidido, an occupational and health economist at the University of Chicago Booth School of Business. That’s why I expect price increases

to hire these workers, you need to offer more.

At the same time, hospital utilization in general has not yet recovered to pre-pandemic levels, so revenues are not keeping pace with costs. And that has contributed to the continued consolidation in the health industry.

Across the country, major hospital companies have swallowed up smaller rivals and merged with other major chains. Medical groups have bought out doctors’ offices, also to influence negotiations with major health insurers.

Meanwhile, private equity investors have taken over more nursing homes and other retirement homes over the past decade. And studies have shown that these acquisitions have led to higher costs.

While health care has lagged headline inflation since COVID-19, historical trends suggest it is bound to catch up, said Matthew Eisenberg, a professor of health policy and management at Johns Hopkins University.

Consumers may respond to higher prices by opting for lower-cost, high-deductible plans, where insurance only kicks in after the insured pays a large amount out of pocket.

Eisenberg fears that some people will be pushed to withhold or delay care, potentially leading to poorer health and financial outcomes for the insured and the wider economy.

That side has come under pressure, he said of the cost shift to the consumer. How much more juice can we get from pressing?