Transformative impact of inflation on the healthcare sector

The once-in-a-century pandemic thrust the healthcare industry into the teeth of the storm. The combination of accelerating affordability challenges, access issues exacerbated by clinical-staff shortages and COVID-19, and limited population-wide progress on outcomes is ominous. This gathering storm has the potential to reorder the healthcare industry and put nearly half of the profit pools at risk. Those who thrive will tap into the $1 trillion of improvement available by redesigning their organizations for speed-accelerating productivity improvements, reshaping their portfolio, innovating new business models to refashion care, and reallocating constrained resources. The healthcare industry has lagged behind other industries in applying these practices; players who are able to do so in this crisis could set themselves up for success in the coming years. This article is the second in our five-article series addressing the gathering storm.

Consumer prices have rarely risen faster than healthcare inflation, but that’s the situation today. The impact of inflation on the broader economy has driven up input costs in healthcare significantly. Moreover, the likelihood of continued labor shortages in healthcare—even as demand for services continues to rise—means that higher inflation could persist. Our latest analysis estimates that the annual US national health expenditure is likely to be $370 billion higher by 2027 due to the impact of inflation compared with prepandemic projections.

Pressure on healthcare input costs

Healthcare supply input costs spiked in late 2020 and 2021 during the COVID-19 crisis. Labor costs per adjusted hospital discharge grew 25 percent between 2019 and 2022, closely followed by pharmaceuticals at 21 percent, supplies at 18 percent, and services at 16 percent.

While these costs have moderated in 2022, they continue to be above the norm; in particular, growth in labor cost remains high.

Clinical labor

The worsening clinical labor shortage is a significant contributor to our projected increase in healthcare costs over the next five years. By 2025, we expect a gap of 200,000 to 450,000 registered nurses and 50,000 to 80,000 doctors (10 to 20 percent and 6 to 10 percent of the workforce, respectively).

These shortages underpin our estimate that healthcare labor cost growth will outpace inflation. We expect clinical labor cost growth of 6 to 10 percent over the next two years, about three to seven percentage points above the prevailing rate of inflation, before a correction to

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