Healthcare Industry Braces for Inflation: Should the Fee-For-Service System Survive?

As inflation persists throughout many sectors of the American economy, many in the healthcare industry are asking, “Are we next?” Although recent medical prices have remained relatively stable compared to the broader economy, there exists a reasonable expectation that inflation will soon impact this industry more severely. Is the current fee-for-service system equipped to weather this financial storm? If not, is there a better alternative? Keep reading to find out:

Healthcare Prices Show Modest Growth Compared to Overall Inflation

Historically, prices for medical services rise more quickly than the broader economy. However, the reverse has been true recently. According to a new KFF analysis, in April of 2022 overall prices (as measured by the Consumer Price Index) were up 8.3% from the previous year. Prices for medical services grew a comparatively modest 3.2% during the same time period. One contributing factor for this discrepancy is that healthcare prices are generally set in advance, either administratively for government programs such as Medicare and Medicaid, or through contracts between providers and insurers. These contracts are often synced to the calendar year. This could potentially cause a delay before wage increases and other costs related to broader inflation measures are fully incorporated into healthcare prices.

Rising Inflation Could Lead to Increased Healthcare Prices and Disruptions in the Market

Although healthcare prices have been less sensitive to inflation so far, many expect that to change in the near future. The longer consumer prices rise at an abnormally high rate, the greater the likelihood that healthcare prices will follow suit. In fact, an 8.5% payment increase for Medicare Advantage is an indication of projected rise in medical spend.

The cycle of inflation could be highly damaging to the current healthcare market. Providers may need to increase prices to compensate for the higher cost of doing business. Smaller providers may even need to merge with larger entities in order to survive. In response to higher healthcare costs, payers could pass down their increased financial burden to the consumer in the form of higher premiums. Unfortunately, the current fee-for-service (FFS) model does not have adequate mechanisms in place to lessen the impact of inflation in the healthcare industry. In fact, the pay-per-procedure nature of FFS may exacerbate the problem, incentivizing providers to conduct more procedures and seek higher compensation from payers during periods of financial volatility.

Value-Based Care: A Strategic Aid to Combat Rising Healthcare Costs

Thankfully, there is a better alternative to FFS when it comes to navigating periods of high inflation: value-based care. VBC contracts have the potential to reduce costs for providers, payers, and patients, which can combat rising healthcare prices. In one 2020 study, BMC Health Services Research found that value-based care can indeed act as a strategic aid to manage rising healthcare costs. During periods of prolonged inflation, the value-generating networks established by VBC can help providers, payers, and patients weather the fiscal storm.

At Enlace Health we believe that value-based care will supplant fee-for-service as the prevailing payment model. In fact, it is already happening in many areas of the healthcare industry. As inflation creeps into healthcare from the economy at large, we know value-based care must continue to cement itself as the new paradigm in healthcare management.

References:

In the pandemic’s latest phase, strategic issues for healthcare providers include labor, inflation and value-based payment

Consumer prices are rising fast, and healthcare isn’t far behind

Fighting healthcare rocketing costs with value-based medicine: the case of stroke management

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