Inflation driving up costs for health systems according to new report

A new report from the American Hospital Association examines the massive surge in input costs for hospitals and health systems due to inflation and dramatic growth in expenses in the medical field. 

The rising costs of inflation along with the continued strain of the COVID-19 pandemic on both the workforce and supply chains have led to ongoing challenges for the American healthcare system. 

“America’s hospitals and health systems, and our caregivers, have been on the front lines in fighting the pandemic for over two years now, facing numerous challenges along the way,” AHA President and CEO Rick Pollack said. “While we have made great progress in the fight against the virus, this report shows that we are not out of the woods yet when it comes to addressing the need to repair and rebuild our hospitals. The dramatic rise in costs of labor, drugs, supplies and equipment continue to put enormous pressure on our ability to provide care to our patients and communities. The pandemic has clearly demonstrated that America cannot be strong without its hospitals and health systems being strong.”

A survey of healthcare workers found that half of the respondents felt “burned out.” This sentiment is shown through a sustained decline in hospital employment, which is currently 100,000 workers lower than the pre-pandemic era. 

The combination of employee burnout, turnover, and staff leaving the workforce has forced an increase in the use of contract staffing firms, which has driven up the cost of labor. 

In the pre-pandemic era, hospitals spent a median of 4.7% of labor expenses on contract travel nurses. The AHA report finds that the median now sits at 38.6%. This increase was also accompanied by a 213% rise in the cost that contract staffing firms were billing hospitals for an hourly rate. 

Labor costs account for roughly 50% of hospitals’ total expenses, meaning that a slight increase in these figures can have drastic effects on a hospital’s operating margin. 

Rising inflation costs and supply chain issues have also negatively impacted the cost of drug expenses. In comparison to pre-pandemic levels, the cost of drugs on a per-patient basis rose 36.9%. The negative impacts also expanded to medical supply expenses which grew 20.6% through the end of 2021 in comparison to 2019. 

The report also showed that economy-wide costs have had a concerning effect on the health system. In April 2021, the Consumer Price Index (CPI-U) had the largest 12-month increase since September of 2008. The CPI-U hit a 40-year high in February 2022.

The effects that it these economic pressures are expected to have on the healthcare system include: 

  • Labor costs and retention
    • As the cost of living increases, the demand for higher wages and more competitive benefits to offset it are expected to increase.
  • Supply chain costs
    • Both inflation and supply chain shortages are predicted to impact the care patterns for patients and put additional burdens on overworked staff
  • Capital investment costs
    • Hospitals have already invested heavily in expanding capacity to treat patients during the pandemic (e.g., constructing spaces for testing and isolation of COVID-19 patients). Additionally, a historically large increase in inflation has resulted in increases in interest rates, which may hamper borrowing options and add to overall costs.
  • Decreased consumer demand
    • Higher inflation costs are expected to result in a decreased demand for health care services which will be traded for necessities such as food and transportation

Taylor Hersch

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