Takeaway: Many of the tools to combat it may not work Post-COVID but innovation and technological advances, given time, might be worth it. ILMN, UNH

Editor's Note: Below is a brief excerpt from a complimentary Health Policy Unplugged note written by our Health Policy analyst Emily Evans

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Inflation is Bad for Your Political Health | Politics, Policy & Power - Trampled  1


Around the time the marijuana cloud cleared, hair styles shortened and the extended party, punctuated by violence that was the 1960s ended, the nemesis for political leaders everywhere arrived to shorten a few careers.

Inflation has such a pernicious effect on political futures because it frequently self-imposed, or at least self-exacerbated. For Richard Nixon, a man whose insecurities about Election Day were legendary (and some would argue, justified), failed to properly attributed inflation in the early 1970s to the Vietnam War effort and President Lyndon Johnson’s Great Society programs, not to mention an acceleration in consumption by the postwar generation.

Frantic to avoid criticism going into the November 1972 election, he responded with wage and price controls, an import tax and a few other tricks that proved disastrous.

The worse part is, he needn’t have bothered. He won the election by a landslide with only dependable Massachusetts opting for George McGovern. Unfortunately, the table was set for the recession of 1973-74 and Nixon’s dramatic decline in popularity which ultimately ended with his resignation over Watergate.

Forgotten in the wake of the Watergate scandal - which now seems almost quaint – is that Nixon’s economic policies made him an easy target.

Since the 1970s, the great lie has been inflation was whipped by a combination of smart central bankers, a consumer-focused anti-trust policy and off-shoring of low margin goods and services. Whipped, that is, unless you have to buy a house, pay a hospital bill or educate a child. It is a lie made necessary by the extraordinary political costs such an admission might bring. 

Now, the money pouring out of the federal treasury the last year, first enabled by former President Donald Trump with electoral problems of his own, then encouraged, in a high stakes game of one-upmanship by President Biden, makes LBJ look thrifty. Meanwhile, the economic fragility uncovered by the COVID pandemic makes many of the aforementioned inflation fighting tools useless. 

The tool that remains, infrequently deployed in the constant quest to coddle the American consumer, is innovation whose re-emergence as a policy priority could fix a lot of things, providing bored central bankers and political leaders can learn a lesson from Richard Nixon.

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Inflationary jolts in health care are poorly accommodated. The system is designed to price goods and services prospectively.

In fact, the Medicare Payment System is called, “the Prospective Payment System.” Such a system works well when input prices – primarily labor – continue their meandering but persistent upward trend: 2% here, 1% there.

Prices the government pays for hospital, hospice and nursing home visits are being established right now. The model CMS uses to determine the payment update is managed by a third-party vendor IHS Global, Inc. whose prediction tends to lag. For example, the latest data from the Office of the Actuary has reported actual data through 2Q 2020. By the time payment rates are set in Medicare, they should report 3Q 2020 data and adjust their forecast to reflect inflation, assuming they find some.

In any event, the IHS model will not accommodate wage inflation in early 2021 until the 2022 payment update cycle, barring some Congressional intervention.

In the near term, multiline service providers probably have enough levers to yank on to manage labor costs. Those that took CARES Act money can use it to offset higher hourly rates. They may be able to compensate with improved pricing from commercial insurers. It is single and dual line services, like home health, hospice IRFs and SNFs, highly dependent on Medicare that will feel the heat as the spread narrows between actual labor costs and what Medicare will pay.

Labor inflation, if it endures, may be another argument for improving the efficiency of the health care system through innovation and technological advancement as long as policy makers stay out of the way.

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Inflation is a tax on anyone who buys stuff, which is to say, everyone. For that reason, most political leaders avoid it like the plague and over the years, they have developed a very large trick bag to avoid it.

Food prices can be kept under control via substitution like powdered milk, something children of the 70s well remember. Off-shoring and pitting low-wage counties against each other results in reduced costs of clothing and supplies. Energy prices can be controlled via higher domestic production.

One driver, of varying effectiveness, has been U.S. antitrust enforcement which evaluates large business combinations through the eyes of the consumer. If reducing America’s protein supply chain to four producers means lower prices at the butcher, then it gets a green light. If health care Group Purchasing Organizations argue they can lower health care prices through vertical and horizontal acquisitions of the supply chain, bring it on!

That is, until everyone must cook dinner every night and hospital administrators find themselves on the company plane trying to score PPE at dark warehouses in distant corners of America.

It isn’t hard to see in our new taxonomy of the health care system (developed with our collaborators at Jumpstart Health Investors) that in the midst of a national and public health crisis, the U.S. had to rely on two testing labs; two dialysis providers and three major suppliers.

With the FTCs intervention in ILMN’s acquisition of Grail and potentially UNH’s purchase of CHNG, we are about to say goodbye to much of that.

While the companies argue that vertical merger challenges rarely succeed, they seem to be missing one of the lessons from the last year. Consolidation has a price all its own.