A surge in hospital service prices in the last quarter of 2007 could be worrisome, especially with an overall economic recession now on everyones mind.
Price inflation in 2007 for hospitals and physicians, according to two mainstay federal gauges, far outpaced overall goods and services, as is typical. Most healthcare analysts consider the Consumer Price and Producer Price indexes to be indirect measurements of healthcare costs, but the preliminary results of 2007 complement recent findings that healthcare spending growth is abating apart from prescription drug spending related to the Medicare Part D benefit (Jan. 14, p. 6).
Theres inflation in what it costs a consumer to buy healthcare, but the growth in that cost is slowing down. However, it is still higher than overall inflation, said Jeff Schaub, a senior director in public finance for Fitch Ratings.
In terms of the nonseasonally adjusted CPI that measures the prices paid by consumers, or retail inflation, hospital prices jumped 8.3% in the 12-month period ended in December 2007, up from the 6.2% increase in the year-ago period. Thats compared with the overall CPI for urban consumers, which was 4.1% in the 12 months ended in December.
Last year was a year of acceleration in retail hospital prices, which had already begun a surge at the end of 2006 and accelerated even faster in the fourth quarter of 2007, said Elaine Cardenas, a medical-care analyst in the CPI unit of the Bureau of Labor Statistics. Overhead and labor have been driving the inflation as well as any kind of service line that is labor-intensive, she said. Although Medicare is not factored into the CPI calculation, the new severity-adjusted DRGs implemented in 2007 had an apparent impact insofar as some commercial insurers are influenced by Medicare. Some commercial insurers that were already using DRGs have already switched to the severity-adjusted coding, while others are waiting, and perhaps accounting for some of the accelerating price inflation in the past quarter, she said.
For the 12 months ended in December 2007 for hospitals, the preliminary PPIwhich measures the prices received by producers of goods and services, or wholesale prices shows those prices rose 3.1% in the 12-month period ended December 2007, down from 3.9% in the year-ago period.
Meanwhile, wholesale prices for physician services rebounded from the near-record lows in 2006an unusual year in price growth for physicians, said Cathy Cowan, a CMS economist. It looks like a rebound to the normal price growth that we experienced before. From talking to everyone at the (Bureau of Labor Statistics), 2006 was a kind of across-the-board price freeze both in the public and private markets.
The preliminary PPI for physician offices outpaced hospital wholesale prices for the 12 months ended in December 2007, rising 4.2%, nearly four times the rate in 2006 when wholesale prices for the year-ago period increased a mere 1.1%.
Last year was high no matter how you look at it for physicians, said Joseph Kowal, a PPI economist at the Bureau of Labor Statistics, which publishes both indexes. The increases seemed to be driven by prices in internal medicine, which went up 11.1%, and general family practices, which went up 6.4% for the
12-month period ended in December 2007. Wholesale prices at multispecialty practice offices also increased by 7.4% over the same period. On the other hand, wholesale prices for obstetrics-gynecology, pediatrics and general surgery increased at much slower rates or even declined, he said.
Similarly, the CPI for physician services spiked 4.1% in the 12-month period ended in December 2007, more than double the 1.7% increase in the year-ago period but more in line with the 3.1% increase in the same period in 2005.
John Cookson, a principal and consulting actuary at Milliman, a consultant to insurers and employers, said the indexes are a hodge-podge of things meant to measure out-of-pocket healthcare costs.
With recession worries on everyones mind and despite healthcares accelerating price inflation, Cookson noted that historically it usually takes a few years for an economic slowdown to soften healthcare costs.
Diagnosing the financial realities by examining hospital income statements, Fitchs Schaub said there was no immediate cause for alarm as healthcare is supposed to be recession-proof, but some recent spikes in bad debt could be related to an economic downturn. As profits are squeezed, employers could continue to cut back on health benefits in the form of higher deductibles and copays, which could translate into pressure on bad debt for hospitals, he said.
Those thoughts were echoed last week by Moodys Investors Service, which said it was maintaining a stable outlook for 2008 for the not-for-profit healthcare sector, however, uncertainties threatened to challenge the industry in 2009 and 2010, the credit rating agency said. In 2007, downgrades continued to outpace upgrades 1.29-to-1 with 40 downgrades and 31 upgradesnearly identical to 2006 when the ratio was 1.30-to-1.