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Higher costs could be just the start of myriad problems to come for providers, insurers, and patients alike.
All eyes are fixated on inflation this year as escalated CPI numbers continue to roll in and the demand for post-pandemic goods and services remains high. Naturally, arguments regarding the breadth and depth of inflation are being made on both sides. Some economists feel the inflated numbers truly are transitory, as Fed Chairman Powell insisted for the better part of the first half of the year, while others are sure that rates will either steady or rise over the next few years. If inflation is here to stay, millions of Americans and many sectors of the US economy will suffer the burden of higher costs.
Inflation should be a key concern for physicians in the coming months years. Not only could a higher rate of inflation affect your own purchasing power and rate of return on your investment portfolio, but it could affect your professional industry as a whole. In fact, it could be argued that higher costs could be just the start of myriad problems to come for providers, insurers, and patients alike.
Inflation results when too many dollars chase too few goods, leading to decreased purchasing power. Simply put: the more demand there is for goods and services, the more things cost; the more things cost, the less you can buy.
What we typically see happen in inflationary cycles are industries raising prices to consumers to combat raising costs. Consumers, in turn, pay more for just about everything from food to housing to healthcare. Higher salaries and better benefits are seldom offered to offset living expenses. So, we start to feel the pressures of inflation when it suddenly costs more to fill up the gas tank or buy the same foods at the grocery store.
Of course, most Americans likely won’t feel the pinch of a 1%-3% price increase too severely, unless they are in the market to purchase from one of the industries that have picked up tremendous momentum since the days of lock-down. Sectors that have seen record post-pandemic growth and elevated prices as a result include travel and leisure activities, used cars, and housing. Luckily, homes, cars, and vacations aren’t recurring purchases and most often take place sporadically and are largely discretionary expenses. But if you notice your dollars aren’t quite stretching as far as they used to, you can thank fiscal stimulus and a rapid economic recovery for putting a squeeze on your budget.
Unfortunately, inflation doesn’t just affect purchasing power, but erodes the real rate on return on investments, as well. Say, for example, you hold Treasury Bonds that yield 1.5%, but inflation hovers at 4%. This means your investment’s real rate of return is actually -2.5%. You are essentially paying to hold these bonds!
This investment holds no value as long as inflation outruns its rate of return. Luckily, history has shown that global stock market returns can dramatically outpace inflation, which is why equities are typically the most popular hedge against it. Of course, equities are not beyond the reach of inflation’s erosive power but do generally outpace it for a positive yield above inflation.
Inflation’s impact on the healthcare industry could be severe. Not only could higher inflation widen the gap between public and private reimbursement—forcing physicians to charge more from their private sector clients—but also cause a spike in insurance premiums. Fewer payers would be able to tolerate upticks in the cost of healthcare related costs, resulting in less insured or underinsured patients.
Over time, insurance companies may try to use their growing market power to limit provider reimbursements, narrow their networks, or reduce patient access to medical care. This is not even to mention the pressure that doctors and hospitals will feel from both sides as they simultaneously contend with higher office costs and tightening revenue.
There are few in healthcare that do well in a higher inflationary environment, so it is important to have the right personal financial safety nets in place to offset these potential professional setbacks.
When inflation is low, it’s easy to overlook how rising prices affect your day-to-day life; when inflation is high, many financial realities in your personal and professional life can change. Many of the challenges that arise from inflation cannot be controlled, but many can be mitigated with the proper planning.