Health care inflation is coming for Biden

Rising health care costs are poised to become the next big battle in President Joe Biden’s war against inflation. It’s unlikely he’ll be able to declare victory in time for a 2024 reelection bid.

Economists, business leaders and health care industry experts are warning that the wage, revenue and supply chain pressures that hammered the margins of hospitals and clinics during the pandemic are about to send health coverage and out-of-pocket medical bills through the roof.

The Federal Reserve Bank of Dallas last month estimated that the rate of health care inflation will almost double between mid-2022 and mid-2023 as insurance starts to factor in surging labor costs for hospitals and health networks.

A dramatic spike in the cost of health insurance — which would be felt by consumers, businesses and government alike — would represent a major challenge to Biden’s post-midterm agenda as he navigates a fractured political environment and deep economic challenges that show no signs of abating. It could spell trouble for Democrats who've long been able to lean on their record of expanding health care access and reducing costs in brutal policy battles with Republicans.

While White House officials say the president and Democratic leaders have already taken meaningful steps to address the problem — the Inflation Reduction Act Biden signed in August included Obamacare subsidies and prescription drug pricing rules that could be a salve to sticker shock — health care advocates and budget hawks say that won’t be enough to remedy a significant deterioration in the affordability and quality of health coverage.

“This is going to be something where consumers feel a pinch — for real,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a bipartisan deficit reduction think tank. “I don't know anybody who is taking the lead on this issue."

The consequences of a prolonged spike would be stark. Once inflation hits employer-sponsored insurance plans, workers whose wages struggled to keep pace with rising prices might be forced into decisions about how they access care. Government institutions whose budgets are already laden with expensive health benefit plans for public employees and retirees might be forced to cut costs or approve rate hikes that would enrage organized labor.

White House officials are bracing for health care-related inflation to get worse but are taking a view that the pain won't last long. Jared Bernstein, a member of the president's Council of Economic Advisers and a longtime Biden confidante, acknowledged in an interview that health care costs will climb in the near term but “we also see them ameliorating after a few quarters.”

The White House is banking on cost-cutting measures in the sweeping health care and climate law that Biden signed into law in August. More steps could also be taken through Medicare and Medicaid to bring down costs.

“If you look at what this president has done, and will continue to do to ease pressures on family budgets when it comes to health care costs — whether we're talking about prescription drugs, insulin coverage through the exchanges, supporting Medicare and Medicaid — when our opponents want to put those on the chopping block every few years? I think there's just no comparison,” Bernstein said.

Economists outside the White House dispute Bernstein's outlook.

“It’s like squeezing the air in a balloon with a knot in it,” said Stephen Stanley, chief economist at the bond trading firm Amherst Pierpont. “If the government tries to squeeze providers, they’ll try to pass that on to insurance companies who are forced to respond.”

“It’s not clear that the economy as a whole gets lower medical prices as a result,” he added.

Until recently, inflation in the health care sector was relatively mild compared to other areas of the economy like rental housing and consumer goods. But that’s only because it usually takes a year or more for the supply chain bottlenecks and rising wages that drive up prices to factor into the contracts that dictate what consumers and insurance plans pay for health care.

The pandemic inflamed labor shortages that had long been endemic to health care, forcing hospitals and nursing homes to pay more for clinicians and support staff as their facilities withstood an endless wave of Covid-19 patients. The cost of common pharmaceuticals and basic medical supplies, including masks and personal protective equipment, also surged as suppliers navigated international shutdown orders and decimated shipping networks.

Those challenges were further exacerbated by the fact that many Americans put off basic care and expensive elective procedures when Covid was at its peak, weakening provider revenues just as their basic costs were soaring. The combination is putting more pressure on health care providers to negotiate higher rates when they renew their contracts with commercial and government-sponsored insurance providers.

“We're definitely hearing about rising supply costs and we're also seeing reports about a tight labor market for health professionals, especially nurses, and the general impact of inflation on wages” in those contract negotiations, said Kris Haltmeyer, vice president of legislative and regulatory policy for the Blue Cross Blue Shield Association. “The impact of these negotiations on insurance premiums really will be something that is phased in over a couple of years.”

The Dallas Fed is projecting insurance plans and consumers will be paying more for medical care through at least the end of 2024 — when Biden has signaled he'll seek reelection — potentially adding another complication to Federal Reserve Chair Jerome Powell’s ongoing battle to bring inflation to heel.

“No matter how the government and the Federal Reserve fight inflation in the broader economy, there are structural shortages that will take a much longer time to fix,” said Bain & Company partner Joshua Weisbrod, who heads the consulting firm’s health care practice in the Americas. “That could create some pretty sticky inflation going forward.”

That’s something the Fed is going to have to watch closely.

Health care prices have an outsize influence in the central bank’s preferred metric for measuring inflation, the Commerce Department’s Personal Consumption Expenditures Price Index.

Another closely watched measurement, the Consumer Price Index, is poised to show declines in health care spending in the coming months. CPI’s methods don’t fully capture what employers or government programs pay for care, however. White House officials say they’re paying close attention to internal projections as well as what’s likely to be reflected in PCE.

Health care advocacy organizations and organized labor groups are starting to sound the alarm on how the rising costs might affect health benefits and the out-of-pocket costs paid by consumers.

As premiums rise to address higher costs charged by providers, there’s a chance that will make some employer-sponsored plans too expensive for workers, Commonwealth Fund Senior Scholar and Vice President Sara Collins told reporters during a briefing last month. Alternatively, some businesses might start imposing higher deductibles and cost-sharing measures.

The effects are also being felt by government plans as well. Democratic leaders in New Jersey are dealing with the fallout of a major political crisis after the state’s health benefits committee signed off on a plan that will increase public worker premiums by 20 percent, citing inflation and greater utilization of health care services.

In September, the American Federation of Government Employees — the largest federal employee union — blasted the 8.7 percent premium increase that members and retirees will have to pay for coverage next year.

“Prices ratchet up but almost never ratchet down,” said Jay Want, a physician and senior adviser at the Peterson Center on Healthcare. “It pushes health care affordability to the front of the agenda. Assuming we do have an economic downturn through the end of 2022 and into 2023 and 2024, affordability becomes a big issue — and it is really tough.”