It looks like
Management consulting company McKinsey released a three-year
"Some of this is just suppy meeting demand," says Neha Patel, a partner at McKinsey. "Inflation will impact healthcare, but the question is, how will the players and the environment react?"
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Employers cannot escape the consequences of inflation or labor shortage in the industry; however, they can begin designing benefits with the future in mind. Patel and Adi Gupta, another partner at McKinsey, break down what's in store for healthcare, and what employers need to do to disrupt concerning trends.
The impact of inflation is on the way
McKinsey expects a 10% annual increase in healthcare spending between 2024 and 2026 — practically double the yearly increases reported in the past.
"Right now inflation in the healthcare sector is predominantly driven by labor costs on the provider side," says Gupta. "Those costs went up last year, and providers are passing those costs to health insurers in the next six to 12 months. Employers haven't even seen the full impact of inflation yet."
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In other words, employers will see the full effect once health insurers have passed those inflated costs to them, and in turn, this will push employers to pass on added costs to workers. Gupta notes that this may lead to a scary scenario, especially for vulnerable populations in the U.S. Those who make less than 200% of the federal poverty level — which in a four-person household falls at $60,000 in annual income — may see healthcare spending take up nearly 75% of their discretionary income.
Growth is on the way — even with a labor shortage
The healthcare services and technology sector will rake in an estimated $81 billion by 2026, while healthcare profit pools are expected to grow 4% annually, soaring from $654 billion in 2021 to $790 billion in 2026. They'll need to allocate some of those funds to hiring and retaining employees: the industry is also expected to be short 3.2 million healthcare workers by 2026, as noted by the American Hospital Association.
"There are some coping mechanisms that the healthcare industry is starting to put in place in order to start to address this," says Patel. "They're starting to invest in automation, and we see an increase in mergers and acquisitions in order for [healthcare companies] to scale more effectively."
Gupta points out that virtual care, automation and AI will become more prominent within healthcare as companies fight to meet demands with limited workers.
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"It's the perfect environment to adopt those technologies," he says. "This sort of dynamic creates a lot of opportunities for innovation in the sector, and these technology sector players will especially grow within the [labor] constraints."
The government sector of healthcare is growing
McKinsey forecasts that government sector profit pools will be approximately 50% greater than the commercial segment by 2026, at $33 billion versus $21 billion. This is largely due to Medicare Advantage plans becoming increasingly utilized. Out of Americans eligible for Medicare, McKinsey predicts 52% will be enrolled in Medicare Advantage in 2026.
Notably, Medicare Advantage comes with annual out-of-pocket limits while likely having lower premiums than a traditional medicare plan. Instead of the state paying healthcare providers directly for each covered service provided (a fee-for-service model), Medicare Advantage pays providers a capped monthly amount for a set list of services beneficiaries can access when needed.
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"You're seeing more and more people age into the government segment," says Patel. "And within medicare itself, we are seeing more people opt for Medicare Advantage rather than the traditional fee-for-service model."
COVID consequences
Gupta warns employers not to forget about COVID, as the cost of managing this disease will mostly fall on their shoulders by the end of the year. From covering vaccine and treatment costs to setting workplace safety precautions, employers will have a lot on their plates.
"Especially if you're an employer group with a lot of employees over 50 years old, you're likely to see higher mortality rates," says Gupta. "Labor shortages could be accelerated. On top of that, the need to manage multiple chronic conditions has gone up with long COVID."
Time to turn to innovative solutions
It won't be easy, but if employers hope to have a chance at controlling costs, they can't stick with the status quo. Patel points to solutions like high-performance provider networks, which narrow down the list of covered providers with their employees' plans to those with the best outcomes and most affordable prices. Additionally, he advises employers to invest in chronic condition management programs that are the most relevant to their employee population.
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Ultimately, employers may have to turn to value-based care, where providers are paid based on patient outcomes rather than the number of services rendered, underlines Gupta. Regardless of the solution, it seems employers cannot expect to control costs with a traditional fee-for-service plan.
"There's no silver bullet that can solve a lot of the challenges," says Gupta. "But you could argue that in a value-based care setting, you would not see this sort of inflation impact."
