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A Comprehensive Exploration of Medical Inflation: Delving Deeper into the Economic Indicator

17 Jul, 2023 Claire Muselman

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Phoenix, AZ (WorkersCompensation.com) - When considering the health and vitality of the U.S. healthcare system, few aspects command as much importance as the fluctuating dynamics of medical inflation. This economic force exerts a considerable influence over medical services' cost, leaving providers and patients riding the waves of its unpredictable flow. Recent years have seen this indicator showing signs of stability, closely mirroring general monetary inflation's path but with a gentler ascent. This commentary, rooted in research conducted by Olesya Fomenko, Ph.D., dissects the complex labyrinth of medical inflation. It spotlights, particularly, the concentric ripples it sends out into the arena of workers' compensation (WC).

Our journey begins with the Medical Consumer Price Index (Med CPI), examined over a decade-long stretch from 2012 to 2022 and serves as an insightful beacon illuminating the inflation rate for generic healthcare services. The microscope applied by Dr. Fomenko to this data uncovered an inflation rate close to 21% within this period, yielding an average annual growth of roughly 2%. Such steady and predictable growth offers an invaluable compass for those navigating the seas of healthcare services planning and policy development.

On venturing further into the nuances of medical inflation, Dr. Fomenko found a slightly reduced inflation rate for medical services within the WC system compared to the general health average. Moreover, Dr. Fomenko discovered noteworthy state-level variations, with states lacking medical fee schedules often encountering higher paid prices. Such differences underscore the instrumental role regulatory mechanisms such as fee schedules play in controlling medical costs.

A noteworthy offshoot of healthcare inflation, hospital inflation, has manifested with a more pronounced surge. This spike can be largely attributed to a higher influx of severe cases in hospital settings, which naturally incur elevated costs due to their complexity and intensity. This factor could be at the helm, steering the higher average prices within this sector.

In contrast, the varied growth rates unearthed through a comparative analysis of different inflationary update approaches underscored various measures and methodologies' powerful role in sculpting the inflation landscape. The Medicare Conversion Factors, for instance, showed a nominal increase of 0.7% from 2012 to 2020 before taking an unexpected plunge into negative territory in the subsequent years. The Medicare Economic Index, however, charted a different course, displaying a steady ascent from 1.1% during 2012-2020 to 2.1% from 2021 to 2022.

Further exploring the terrain, the Consumer Price Index for All Urban Consumers (CPI-U) served as a barometer, revealing substantial fluctuations over the years. From a modest increase of 1.6% from 2012-2020, it jumped to an eye-opening 8.0% from 2021-2022. The CPI-U's medical care component followed this oscillating trend but at a smaller magnitude, thereby illustrating the volatility across different sectors of the economy.

A defining revelation from this exploration is the significant stake hospital services hold in workers' compensation medical payments. The research indicates that these services represent more than 40% of all medical expenditures, divided into outpatient services at 26% and inpatient services at 18%. Other services like professional services accounted for a smaller piece of the pie at 34%, and Ambulatory Surgery Center (ASC) care stood at 9%, leaving the remaining 13% to other medical services.

Dr. Fomenko examined the Producer Price Index (PPI) trends between 2012 and 2020 to delve deeper. The PPI for Health Care Services recorded a cumulative growth of 21.4%, suggesting an average annual growth rate of 2.0%. Hospital Outpatient Care and Hospital Inpatient Care followed suit with developments of 28.6% and 26.7%, respectively. However, the growth for Physician Care was more tempered, settling at 9.3% for the entire period.

Looking ahead, several factors demand close attention as potential influencers of the course of medical inflation. Among them are general inflation trends in labor, products, and materials, especially considering recent shortages in the healthcare sector, which have led to higher labor costs. Concurrent shifts in pricing controls and network discounting mechanisms also add another layer of complexity to this evolving scenario.

The ongoing consolidation trend among medical care providers suggests a potential shift in negotiating power. This altered balance could precipitate notable changes in pricing dynamics. The demographic shift towards an older workforce is another factor worthy of consideration. While it might lead to fewer injury cases, the severity of these cases could be higher, thereby adding another variable to the equation of medical inflation.

While there has been some degree of stabilization in medical inflation trends, it's paramount to remain cognizant of the many variables at play. The healthcare landscape is constantly changing, shaped by macro and micro-level factors. Keeping pace with these shifts is crucial in crafting effective strategies to maintain an affordable and high-quality healthcare system that meets the needs of all, including those entangled in the complexities of workers' compensation cases.


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    About The Author

    • Claire Muselman

      Meet Dr. Claire C. Muselman, the Chief Operating Officer at WorkersCompensation.com, where she blends her vast academic insight and professional innovation with a uniquely positive energy. As the President of DCM, Dr. Muselman is renowned for her dynamic approach that reshapes and energizes the workers' compensation industry. Dr. Muselman's academic credentials are as remarkable as her professional achievements. Holding a Doctor of Education in Organizational Leadership from Grand Canyon University, she specializes in employee engagement, human behavior, and the science of leadership. Her diverse background in educational leadership, public policy, political science, and dance epitomizes a multifaceted approach to leadership and learning. At Drake University, Dr. Muselman excels as an Assistant Professor of Practice and Co-Director of the Master of Science in Leadership Program. Her passion for teaching and commitment to innovative pedagogy demonstrate her dedication to cultivating future leaders in management, leadership, and business strategy. In the industry, Dr. Muselman actively contributes as an Ambassador for the Alliance of Women in Workers’ Compensation and plays key roles in organizations such as Kids Chance of Iowa, WorkCompBlitz, and the Claims and Litigation Management Alliance, underscoring her leadership and advocacy in workers’ compensation. A highly sought-after speaker, Dr. Muselman inspires professionals with her engaging talks on leadership, self-development, and risk management. Her philosophy of empathetic and emotionally intelligent leadership is at the heart of her message, encouraging innovation and progressive change in the industry. "Empowerment is key to progress. By nurturing today's professionals with empathy and intelligence, we're crafting tomorrow's leaders." - Dr. Claire C. Muselman

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