Inflation pushes health systems toward financial austerity

Editor's Note

US hospitals and health systems are facing growing financial pressure as inflation drives costs faster than reimbursement can keep up, according to a July 10 article in Health Affairs.  

Although growing steadily, healthcare spending has been largely stable when measured as a percentage of gross domestic product (GDP). “From a budgetary perspective, the overall growth of total health care expenditures seems to be slowing” despite increased demand and other factors, Health Affairs reports. Among other explanations for this slowing—reforms to payment and delivery systems, “relatively modest” Medicare reimbursement increases—is inflation, which was “historically low” between 2009 and 2020 but rose from 2021 to 2023 and is now “stabilizing at a higher baseline.” Overall, “the mismatch of revenue growth and expense growth for providers of health care will result in unprecedented strain for physician groups, hospitals, and health systems.”

The article notes that when inflation was low, small payment increases were enough to cover cost growth, allowing overall health spending to rise in line with GDP. Today, that balance has shifted. Cost growth is outpacing revenue, and hospitals are showing signs of financial strain. Some are conducting layoffs, closing service lines, or shutting down entirely. The federal aid that helped stabilize health systems during COVID-19 was a time-limited intervention for a time-limited crisis, and the article reports that hospitals are unlikely to see similar support for inflation-driven challenges. Small, rural health systems and those with high shares of Medicare and Medicaid patients are facing the greatest risk.

Policy responses to inflation are constrained. Raising Medicare reimbursement would require significant tax increases and is politically unlikely. Raising commercial prices would vary based on market power and could raise overall health care spending. Cost-cutting options—such as replacing skilled labor with lower-cost staff or reducing unprofitable services—carry tradeoffs in quality, access, and equity. Attempting to shift patient mix toward commercially insured individuals may conflict with organizational missions. To adapt, the article suggests that health systems must undertake deeper structural changes.

Notable data cited in the full report include the following:

• National health expenditures nearly doubled in nominal terms, from $2.5 trillion to $4.9 trillion
• Measured as a percentage of GDP, expenditures remained stable at 17% to 18% of GDP, apart form a temporary increase during the COVID-19 pandemic.
• Inflation averaged just 1.7 percent annually from 2009 to 2020—historically low compared with 2.9 percent in 2000–2008 and 3.0 percent in 1990–1999. In 2021–2023, inflation jumped to 5.6 percent.
• Labor costs account for nearly 60% of hospital operating budgets, and are currently rising 4% to 7% per year. Tariffs may further accelerate inflation and increase costs.
• Inflation is outpacing healthcare revenues, with the 2024 market basket update for inpatient services amounting to a net increase of +3.1% after a -0.2% productivity reduction from the original +3.3%. Medicare increased outpatient payments by 2.8 percent and reduced physician fees.