The drivers and far-reaching impacts of medical inflation

May 28, 2024

Small stacks of blocks at ascending heights with the years, 2021-2024 engraved on them to indicate the passage of time.
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By Dr. Teresa Bartlett, Managing Director and Senior Medical Officer; Max Koonce, Chief Claims Officer

While little-by-little, overall inflation has (for the most part) been steadily cooling, it has shifted from primarily affecting goods and commodities, to services — and has caught up to sectors like the healthcare industry. The average price of healthcare in the U.S. increased by 2.2% in the 12 months ending in March 2024, following a previous increase of 1.4%, according to April 2024 inflation data released by the U.S. Labor Department’s Bureau of Labor Statistics (BLS).

Between the unparalleled staffing shortages, the rising wages employers are offering to incentivize a shrinking market and the increase in medical costs and services, hospitals, insurers, employers and claimants have a concerning issue to contend with. Looming medical inflation — present now and likely to persist within the healthcare industry — will cause ripple effects that will be felt by Americans for years to come.

Medical inflation continues to rise

While employers are seeing medical claim volumes largely return to baseline following the COVID-19 pandemic, inflationary cost pressures are something else entirely. Sedgwick data points to a handful of healthcare categories that had been driving the inflationary bubble in the beginning of 2024: surgical (up 3.6% YoY), physical therapy (up 3.5%), evaluation management (up 3.1%) and diagnostics (up 4.5%), on a per cost unit basis. All the while, during this time, the larger healthcare market hung at around 3% from an inflationary standpoint. 

Factors driving medical inflation

The proportion of nationwide healthcare workers available versus policyholder demands is increasingly dire, and its implications are a significant factor driving up inflation. Meanwhile, those that make up the demographic of healthcare industry professionals are largely aging; some experts estimate that 40% of America’s physicians will be 65 or older within the next decade. According to an American Hospital Association fact sheet, there will be an estimated shortage of up to 3.2 million healthcare workers by 2026.

To put it simply, healthcare institutions need people to hire — badly — to keep up with demand, and employers have been offering higher wages to entice talent. For a patient to be able to see a physician to receive medical attention, it is costing hospitals, clinics, everyone, more — to bring those providers on board. Those cost increases are passed down the line. 

Inflation has also permeated the medical supply chain. Medical equipment parts are becoming pricier to repair, replace and service — impacting the physical availability of critical medical tools, and raising the prices hospitals need to pay to secure them — which eventually aids in inflating the cost of medical services, such as surgeries.

Consequences on workers’ comp

The provider shortage on its own can lead to staggering implications. One concern is that it will eventually result in patients being forced to delay, or altogether forgo, medical treatment. In Q4 of 2023, the average duration between a worker’s date of injury and subsequent surgery date, was generally longer — by anywhere from one day to 10 days depending on the state — than it had been at the same time the year prior, according to Sedgwick data. States with a larger rural population may be the ones feeling the greatest pinch in terms of healthcare access.

These delays not only increase the duration of the claim, and the disability that may be paid out while the employee is out of work, but also lengthens their recovery period. This could further impact their return-to-work trajectory and hinder chances of a better outcome. Studies show delays in an injured worker’s medical treatment process does not help their recovery path, nor does it aid their return to gainful employment — which is a large part of what the workers’ compensation process is expected to do. 

Cost containment options

To contain costs while also maintaining a high-quality standard of care, employers should ensure they’re engaged with preferred provider organization (PPO) networks. Minimally, employers can reap discounts beyond fee schedules, and can access other powerful clinical resources. Tools like utilization review (UR), where treatment processes are analyzed to ensure evidence-based medicine is considered as the standard, consistent way, and an injured worker’s medical recovery is monitored closely, resulting in better outcomes. Employers can also use nurses and return-to-workspecialists where it makes sense in their programs to ensure the right sequence of care is being given by high-performing providers, wherever possible.

Tips for claimants

Claimants should be mindful of the importance of advocating for themselves. While the supply chain and labor market tend to correct themselves over time, it is a slow and imperfect process. Be prepared to see longer wait times for appointments, and plan ahead, when possible, to tackle the heftier-than-usual medical bills. Hold the system to account by pushing for access to high-quality providers and advocate for your own ability to receive expedited care. 

Sedgwick will continue to track and analyze data and provide recommendations on the ebbs and flows of inflation’s impact on medical costs. In this rapidly evolving environment, organizations are best-equipped to position themselves to adapt and respond to future market conditions by staying informed today. 

Learn more

  • Read about Sedgwick’s range of integrated managed care solutions — including clinical consultation/nurse triage and PPO and ancillary care — designed to streamline the process and help injured employees return to work and life as safely as possible.
  • Hear from industry experts and stay up to date on the latest trends and developments through our blog

Tags: Casualty, empowering performance, health, health concerns, Healthcare, Helping people, inflation, Liability, Managed care, Medical care, Medical costs, Workers comp, workers compensation