8 reasons why health care cost inflation is likely to escalate

Health care costs in the U.S. decreased for the first time in our lifetimes due to decreases in elective, preventive, and chronic disease care caused by the pandemic. By 2021, however, health care costs caught up to pre-pandemic projections. Eight factors, outlined below, indicate a return to health care cost increases far above inflation, posing enormous challenges to employers and health plan sponsors.

1.  Provider costs have genuinely increased. 

Hospitals and providers are not impervious to general inflationary trends. Providers face increased costs for fuel and medical supplies and will seek to pass on these costs. The “Great Resignation” has not spared health care. Hospitals also face staffing shortages, and agency and “travel” nurse expenses have soared. These increases raise the cost basis for medical care and will increase health care inflation in coming years.

2.  Providers will have more leverage at the contracting table due to provider consolidation and public sympathy.

Weaker hospital systems and providers were more likely to fail during the pandemic, and their volume is likely to have been absorbed by stronger systems that enjoy more negotiating leverage and higher reimbursement rates.

Many health plan contracts with health systems are three or more years long, so these increases could extend through or beyond 2025.

Providers saved countless lives during the pandemic, and doctors, nurses and others practiced at great personal risk in excruciating conditions with crippling shortages of personal protective equipment. Health plans will have a harder time in the court of public opinion during contractual disputes, making them more likely to accede to provider financial demands.

3.  The cost of drugs will continue to rise.

There’s also been no slowdown in the rise of drug prices during the pandemic, and the federal government has failed to pass any meaningful legislation to control drug prices.

There is widespread public support for regulations to address the high cost of drugs in the U.S. compared to other developed countries, but little agreement among legislators about what action to take.

The pandemic led to a slowdown in research and approvals for new drugs not aimed at coronavirus. As the pandemic recedes, there will be an increase in the number of new and expensive personalized drugs.

4.  Preventive care, chronic disease management, and non-emergent surgeries were delayed or foregone during the pandemic.

Mammography and colonoscopy screenings fell dramatically during Spring 2020, and cancer screening rates have not yet recovered. Decreased cancer screening lowered medical costs during the pandemic but could raise future costs as more patients are diagnosed with later stage, high-cost cancers in subsequent years. For example, UC Davis has already reported a four-fold increase in diagnosis of Stage IV breast cancer.

Childhood immunization saves lives and costs by preventing epidemics like measles, but pediatric vaccinations were down 42 percent in Spring 2020. While vaccination of preadolescents has rebounded, adolescent vaccination continues to lag without a compensatory bump to make up for vaccinations missed in the first year of the pandemic. Childhood vaccines save thousands of lives and billions of dollars; fewer children fully immunized will increase health care costs as well as lead to preventable illness and death.

Some patients delayed or avoided medical care for chronic conditions like heart disease or diabetes, and we might face higher costs from complications including end stage renal disease and congestive heart failure due to more advanced disease in subsequent years. Some patients will never get the non-emergency procedures they missed during the pandemic, but many delayed surgeries and other procedures will be scheduled in the future. Some of these, including operations for cancer and orthopedic disease, could be more complicated than originally planned.

5.  Costs of long-term complications of COVID-19 could be large.

As many as one in six who have recovered from COVID-19 continue to have symptoms six months later.

Researchers also found that incidence of heart attack, stroke and congestive heart failure soared after recovery from COVID-19. Even mild cases of COVID-19 can lead to lasting damage to small airways. Researchers have also identified cognitive decline and changes in brain anatomy associated with COVID-19.

There are ten drugs now under investigation to treat Long COVID; these could improve quality of life and decrease disability but are likely to be costly.

6.  The pandemic has worsened mental health.

Three times as many Americans report severe symptoms of anxiety and depression compared to before the pandemic, and drug overdose deaths are at their highest level in history.

Access to mental health care was poor even before the pandemic, and many continue to be unable to get necessary mental health care despite the dramatic increase in virtual care. Untreated mental illness is associated with substantial preventable medical costs, and the emotional trauma from an event with widespread death can last for years.

7.  Government programs that have funded vaccinations and treatments for COVID-19 will expire this year.

The federal government has purchased all COVID-19 vaccinations, monoclonal antibodies, and doses of oral medication for COVID-19 since the beginning of the pandemic. But funds to pay for these products are fast running out, and billions in funds for vaccines and therapeutics requested by the Biden administration face an uncertain future in Congress.

We often don’t know what price the government is paying for these products, but the unit cost paid by private insurance plans is likely to be higher, and employer-sponsored health plans are paying only administration costs for vaccinations and COVID-19 drugs now.

8.  The end of the pandemic emergency will decrease Medicaid enrollment and enhanced subsidies for exchange plans are set to end.

State Medicaid agencies have been prohibited from disenrolling Medicaid beneficiaries during the pandemic, but millions could lose their Medicaid benefits when the pandemic emergency is over.

Federal subsidies for those purchasing individual insurance on the exchanges will also decrease at the end of 2022 unless new legislation is passed.

Some employees or their family members who have remained on Medicaid or exchange plans and waived employer sponsored health insurance during the pandemic could seek coverage from employers. We will likely see an increase in those who are uninsured, which will place additional pressure to shift costs to commercial health plans.

All this points to a return to extreme annual health care inflation which will pose challenges to employers and other plan sponsors. Government will also feel pressure from rising health care costs, as it provides health insurance for government employees, senior citizens, the poor and disabled, and subsidizes insurance for many in the individual market. At a time when wages are increasing, health care inflation further increases total labor costs, increasing the likelihood that companies will pursue automation or offshoring.

Employers have responded to health care cost increases in the past by shifting costs to members, which lowers plan sponsor costs but exacerbates health care affordability concerns at a time when many families are already having trouble paying for health care. Employees are increasingly willing to consider leaving their current employer, making further cost shifting an undesirable approach. 

In response, employers will use formularies to manage drug costs and steer members to lower cost providers to manage medical costs. Additionally, they’ll look to better coordinate care of the 5 percent of members with serious illness who account for roughly half of total health care costs. Employers likely will continue to increase access and engagement in mental health services. Alternative payment models such as bundled payment and capitation can lower total cost by lowering utilization. Restrictions on site of service can decrease total costs by directing patients to lower cost settings. Other options include value-based contracting and value-based insurance design that can increase uptake of high-value care and decrease utilization of low-value care.

Overall, employers and other health plan sponsors will need to return to steady vigilance and proactive strategies and programs that allow them to prepare for substantial increases in health care costs coming over the coming years.

Jeff Levin-Scherz, M.D., MBA. is an assistant professor at the Harvard T.H. Chan School of Public Health and a managing director and population health leader of the North American Health and Benefits Practice at Willis Towers Watson. Follow him on Twitter @jlevinscherz