Rising labor costs and high inflation rates are expected to drive up the annual U.S. national health expenditure by $370 billion by 2027, according to a recent report from McKinsey.
That is compared to prepandemic projections of rising healthcare costs, largely due to high inflation rates. The Consumer Price Index (CPI), which measures inflation, reached 8.3% in the latest update from the U.S. Bureau of Labor Statistics (BLS).
In addition to higher costs across the economy and industries, labor costs have also risen sharply since the onset of the COVID-19 pandemic. Strained resources and high demand for specialty nurses has forced healthcare providers to up compensation and benefits. According to McKinsey, labor costs per adjusted hospital discharge rose 25% from 2019 to 2022. Pharmaceuticals rose 21% over that time period, while supplies rose 18% and services went up 16%.
A rising labor shortage is also pushing up labor costs overall. McKinsey projects a registered nursing gap between 200,000 and 450,000 by 2025, as well as a gap of 50,000 to 80,000 doctors. That comes out to between 10% and 20% of the workforce for registered nurses and 6% to 10% of doctors.
“These shortages underpin our estimate that healthcare labor cost growth will outpace inflation,” the report stated. “We expect clinical labor cost growth of 6[%] to 10[%] over the next two years, about three to seven percentage points above the prevailing rate of inflation, before a correction to about 0.7 percentage points over the prevailing inflation rate through 2027.”
Areas with the most projected need include ambulatory, hospital-based outpatient departments, home care, skilled nursing facilities and hospice settings, which could see a 7% to 10% annual increase in need for registered nurses between 2021 and 2025. The workforce supply is also expected to weaken, with attrition rates of 7% in 2021 and 2022, before a return to normal levels in 2023. Overall, the labor shortage will create $170 billion in incremental costs by 2027.
“Our analysis shows that if players do not take any mitigating action, industry profit pools will erode in all three scenarios, due to the lag in contracting cycles described above and the inability of most players to pass on increased administrative costs,” McKinsey predicted. “The magnitude of the impact varies, and even within each example the impact on any one company could differ greatly compared with other firms.”
Healthcare leaders are also expecting inflation to eat away at operating margins, with payer and provider executives expecting a drop of between 25% and 75%. Earnings could be totally wiped out with margins of just 2% to 4%. As a result, hospitals and providers may have to result in layoffs, McKinsey predicted. A quarter of execs in the report stated they may have to lay of 10% of their staff over the next 18 months.
See the full report here.
Amy joined TriMed Media as a Senior Writer for HealthExec after covering home care for three years. When not writing about all things healthcare, she fulfills her lifelong dream of becoming a pirate by sailing in regattas and enjoying rum. Fun fact: she sailed 333 miles across Lake Michigan in the Chicago Yacht Club "Race to Mackinac."