Snapshot: What’s the Future of Healthcare Inflation?

Healthcare can be an expensive budget category for many people. So far, the PCE (Personal Consumption Expenditures) price index shows healthcare inflation running at just under 3% year-over-year. That may seem reasonable, with the full index currently calculated at 4.4%. But our colleagues in Goldman Sachs Research don’t think that’s the whole story.

In their view, healthcare prices appear unsustainably low and likely to accelerate in the near future. Here’s why:

• The input costs of medical care (including labor and supply expenses) have increased approximately 13% since 2019. This has outpaced the prices consumers pay for that healthcare by roughly 5%, causing negative operating margins for nearly half of US hospitals. 
• Healthcare inflation tends to lag other sectors because of staggered price setting and multi-year contracts. Government-administered prices (Medicare and Medicaid) are reassessed on an annual basis, while private-payor prices are negotiated even less frequently – often once every three years. Our Research analysts estimate that the lead time between wage and price inflation in the healthcare sector is at a lengthy 18 months. 
• So, even as wage and supply cost pressures ease today, last fall’s 5.7% spike in healthcare wage growth argues for an upcoming spike in healthcare inflation. 
• At the same time, the ongoing rebalancing of other macro factors over the next couple of years is likely to moderate inflation in healthcare, as in other parts of the economy.