Inflation and Labor Costs Will Increase Health Care Spending to $370B

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Inflation and rising labor costs will increase U.S. national health care spending by $379 billion in the next five years, according to a McKinsey report.

Between 2019 and 2022, labor costs per adjusted hospital discharge rose 25%, supplies costs grew 18%, and services costs rose 16^. These costs have somewhat stabilized n 2022, but they remain high above the norm.

In addition to the ongoing clinical labor shortage, McKinsey researchers estimate a shortage of 200,000 to 450,000 registered nurses and 50,000 to 80,000 doctors by 2025, with clinical labor costs expected to grow by 6 to 10% over the next two years, which is 3 to 7 percentage points higher than the prevailing inflation rate.

The annual demand for registered nurses continues to grow and is expected to increase by 7 to 10% between 2022 and 2025, with workforce shortages predicted to worsen due to increasing demand and decreasing supply. Attrition rates and retirements are also likely to exceed the number of nurses and healthcare workers obtaining licensures, further increasing shortages.

“From a practices perspective, many nurses, especially in hospital settings, have sought to move away from direct patient care,” according to the McKinsey report. “Our surveys indicate that reasons include a perceived lack of support, safety, and flexibility.”

Clinical labor shortages are also predicted to account for $170 billion of the total expected healthcare spending increase by 2027. This will also likely affect care access in part due to potential clinic closures and increased wait times, in addition to non clinical workers and personal care aides being overworked, making it harder for practices to retain their non clinical staff.

McKinsey researchers also predict supply chain issues will continue in the U.S., causing healthcare costs to increase by up to $110 billion in the next five years.

Inflation Rates

While payers may not see a huge increase in insurance costs due to inflation for another three years, providers are being hit hard due to contracting and renewal cycles and their inability to pass on increased costs to employer-sponsored health plans – which are governed by life cycles that typically last for three years.

Public payers, including Medicare and Medicaid, will likely see increased costs in two or three years as these programs will use historical inflation rates to set next year’s prices.

Healthcare leaders expect inflation to have a substantial adverse effect on margins, and some executives said they might have to turn to layoffs and address the clinical gaps through technology and skill-mix optimization.

“Healthcare executive will need a disciplined approach and fast action if they want to come out stronger from this period,” the McKinsey researchers wrote. “Well-known tactical actions exist that can spur the required improvements, just as a set of well-understood organizational measures can help companies thrive during a period of uncertainty.”

Read the full report. 


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