What Inflation Means for Your Health Care Costs

U.S. health care prices could rise more than expected in the coming years, due to increased spending after the COVID pandemic and soaring inflation.

The price of health care has typically outpaced the average cost of goods and services in the U.S., growing at a consistent rate over the last two decades.

Since 2000, health care costs have increased more than 110 percent compared to 71 percent for all consumer goods and services.

These costs have been rising at a steady rate of between 1 percent and 5 percent a year since 2001 and have remained higher than the rate of inflation in 15 of the last 20 years.

But the inflation rate has risen to almost 3 percent higher than the rise in medical care costs this year, making it the second year in a row where inflation has surpassed health care cost increases.

Health care costs increased 5.4 percent in the last year—the largest annual increase since 1993—but are still below the 8.3 percent pace of inflation.

Experts are growing concerned at the disparity with inflation, as they anticipate the cost for health care supplies and labor could outpace inflation in the future.

In 2020, the U.S. spent a total of $4.1 trillion on health care, with average spending on health care over the 15 years from 2006 increasing by just under $125 billion a year.

Spending increased substantially in 2020 following the COVID pandemic, increasing around $365 billion from the prior year.

Analysts at consulting firm McKinsey & Company estimate that this figure will rise, growing at a rate of 7.1 percent annually over the next five years, with national health expenses likely to be $590 billion higher by 2027 than the projected $5.8 trillion.

Heightened inflation is expected to account for $370 billion of this difference, with $148 billion coming from elevated clinical labor inflation rates and a shortage of clinical staff.

Testing, vaccination, and treatment of COVID-19 and the associated increased burden of behavioral health could add another $220 billion in annual costs over the next five years.

"Consumer prices have rarely risen faster than healthcare inflation, but that's the situation today," McKinsey analysts said in a recent report. "The impact of inflation on the broader economy has driven up input costs in healthcare significantly.

"Moreover, the likelihood of continued labor shortages in healthcare—even as demand for services continues to rise—means that higher inflation could persist."

The analysts at McKinsey have reported that the increase in healthcare input costs is being felt primarily by providers, rather than consumers, and that it could take several years for the impact of inflation to filter down to reimbursement rates.

In a recent survey, employers said they were growing concerned about the rising costs of healthcare, in part due to the rising cost of benefits.

The firms surveyed stated that benefit costs increasing more than 4 to 5 percent a year were unsustainable. Over the last three years, health care benefits rose around 6 to 7 percent. Some 95 percent of these employers also reported that they would have to consider reducing benefits if costs increased 4 percent or more.

Those who pay for their medical care through government-funded services, such as Medicare or Medicaid, would likely start to see increased costs in two to three years.

The 2022 Medicare Trustees report also projected that the hospital insurance trust fund balance is likely to turn negative in 2028, limiting the support it could give to Americans.

And, as the Federal Reserve raises interest rates and shrinks its balance sheet, interest payments on federal debt are expected to double as a proportion of the U.S. budget between 2022 to 2027.

Insurance premiums are also reportedly on the rise. Recent analysis of 72 insurers across 13 states found that insurers were seeking higher premium increases than in recent years—averaging around 10 percent—with only four insurers planning to reduce premiums.

In 2021, the average family faced an estimated annual exposure to medical care costs before coverage of $8,000 to $12,000, with more than one in five reporting more than $1,000 in medical debt.