Inflation's Hidden Impact on Healthcare: What's Driving Costs Up?

Healthcare spending in the U.S. is higher than in any other nation. As of this writing hospital services have increased 7.2% over the last 12 months. In 2022, healthcare costs reached $4.5 trillion, with individuals spending an average of $13,493 annually. With soaring prescription drug prices, higher deductibles, and premium increases, costs are getting out of hand.

According to Price Waterhouse, “The cost of treating patients is on the rise. The healthcare industry is under pressure from high inflation, rising wages, and other costs, which are only compounded by clinical workforce shortages. Health payers are negotiating pricing with hospitals while provider profit margins continue to erode. Health plans are also feeling the squeeze of higher median prices for new drugs as well as increasing prices on existing drugs.”

While corporate greed is often where people want to place the blame, it’s helpful to understand that this is not the only issue. Unethical price gouging plays a role, but there are other hidden factors driving costs. “

The truth is that rising healthcare costs are a multifaceted problem. Understanding this and the specific factors driving higher costs can help people take the necessary steps to try and reduce their healthcare spending.

According to Economist Valarie Rhea, ” …without Medicare, healthcare costs in the US would also likely stabilize…today, about half of every dollar Americans spend on healthcare is the result of government regulation, waste, fraud and abuse – and most of the power to drive these ridiculous expenses comes from Medicare’s enabling legislation. Few people realize it, but non-Medicare patients pay significantly more for healthcare so that Medicare patients can pay less. The difference is about another trillion dollars a year, on top of the $2.5 trillion paid out directly to beneficiaries.”

Understanding Inflation’s Impact on Health Insurance

Inflation isn’t just an increase in the price you pay for goods. This is one way of looking at it, but a more helpful definition of inflation is that it represents a decline in the purchasing power of your money over time.

Part of the reason inflation affects health insurance so much is because it involves a contract where the individual makes small payments over a period of time. If you were to pay a lump sum upfront for medical services, then you might not pay as much because you would only need to pay based on the present cost.

However, because you pay for insurance over time for medical services you might not need until a later date, insurance providers have to take that into account. The medical care you need might end up being more expensive down the road than it is when you initially start paying your premiums.

What Factors Are Driving Healthcare Costs Up?

As the price of goods and services rises, health insurance companies have to adjust their prices as well. However, it’s not just the rising cost of goods that is causing healthcare inflation. Below are some of the lesser-known factors that are contributing to the issue.

Administrative Spending

According to Harvard Magazine, the main component resulting in higher medical spending is the cost of healthcare administration. The report states that “about one-third of healthcare dollars spent in the United States pays for administration.” The supposed issue is the inefficiency of U.S. administrative services and tasks, such as disorganization, wasted resources, and an overall lack of standardization.

Use of Expensive Technologies

Another factor also reported by Harvard Magazine is spending on sophisticated medical technologies. In America, we have more high-tech devices and machinery, and yet our healthcare outcomes are no better than in other countries, like Canada, that don’t spend as much on high-tech medical equipment. In fact, the U.S. typically has higher rates for things like heart disease, even though we pay more for cardio equipment and cardiologists.

An Aging Population

Research is also showing that a contributing factor in rising healthcare costs is our aging population. Twenty percent of healthcare spending growth by 2025 is predicted to be caused by aging. This is because the U.S. population age 65 and older has significantly increased over the past several years. Obviously, people over 65 tend to require more medical intervention due to age-related health problems, and this results in an increase in healthcare spending and costs.

Increase in Chronic Diseases

Chronic disease is becoming a growing crisis in the U.S., which can also be attributed to rising healthcare costs. According to the CDC, six out of 10 Americans now live with at least one chronic disease. Having a chronic disease means more doctor’s visits, hospital stays, and more extensive treatments, all of which contribute to rising healthcare costs.

Strategies to Mitigate Rising Healthcare Costs

While policy change is necessary to effect greater change in the healthcare industry to prevent costs from getting out of hand, some things can be done in the meantime to mitigate costs.

Employers are expected to see the cost of healthcare packages rise by 8.5% this year (2024), but there are ways they can reduce spending while still providing their employees with quality benefits. This can include:

Implementing wellness programs to promote healthier lifestyles for employees
Using healthcare assistance programs
Adopting flexible work scheduling to promote a healthier work/life balance for employees to mitigate the negative health impacts of burnout
Looking into health plans that provide telehealth services, which are often more affordable than in-office visit
Shifting to using Health Savings Accounts (HSAs)

For individuals, there are also things that can be done to reduce how much they spend annually on medical services. Adopting a healthier lifestyle, for example, can reduce the risk of developing chronic illness.

It’s also helpful to stay in-network as much as possible when looking for providers. In-network rates are almost always lower than what it will cost to see a healthcare provider who is out-of-network.

When it comes to prescription drugs, opt for generic brands as much as possible. While not all medications have a generic version, many do, and they are often significantly less than what you would pay for a name brand.

If you don’t have insurance or can’t afford it, there are also ways to pay for medical services without overspending. If you don’t have dental insurance, for example, you can look into dental school, as dental students often offer reduced-price services. You can also look into dental discount plans offered by dental offices directly.

Some doctor’s offices or dentist offices will also offer payment plans to help you more easily afford the cost of expensive procedures.

Final Thoughts

While rising healthcare costs can be frustrating and even debilitating, knowing and understanding the reasons behind inflation can empower you to make changes that can help you avoid paying more than you need to. Employers, too, can use this knowledge to get ahead of rising costs and mitigate costs for their business and their employees.

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