I went over this in yesterday's 4Q Macro Health Care Themes Call (replay here) but to reiterate the point, the inflation you now know and hate has not yet swallowed and digested health care spending in full. Through much of the recent pandemic, COVID-related expenditures were off-set by a reduction in non-COVID spending. Cost-sharing for any case that included laboratory confirmed SARS-CoV-2 was waived. Medicaid's enrollment practices are running wide-open.
All the while, health care's primary input - labor - has became more scarce and more expensive. As COVID ebbs and people appear to require more intense care, cost sharing, as expressed by CPI has accelerated. Yet to be baked in are new financing arrangements from commercial payers that reflect the new costs. The Employment Cost Index, on which the federal government relies for estimating total labor costs in health care and elsewhere, took off in 3Q 2021 and it does not appear to be finished.
As the Dallas Fed points out, Personal Consumption Expenditures for health care, with its 18% share of the PCE Index, tend to lag the ECI by about 12 months. That means the potentially unfinished acceleration in ECI will influence PCE well into 2023. They estimate a 70bp effect on core-PCE, 32bp above 2022 levels.
Health care gets a bad rap for its prices and that is well deserved. However, its year over year rate of change has been consistently in the ~2.0% range, thanks to flat and/or negative wage growth. Now that has changed and we have to go all the way back to the late 1980s for a comparable set of circumstances.
Please let me know f you have any questions.
Emily Evans
Managing Director – Health Policy
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