Payroll May Be Healthcare's Biggest Cost Driver

John Commins, April 25, 2011

What is driving healthcare inflation?

We hear about voracious trial lawyers and defensive medicine, new-fangled "must have" medical technologies, ballooning executive salaries, institutionalized inefficiencies, and expensive and overused imaging. To say nothing of outright fraud and incompetence. There are scores of explanations, and no doubt they all contribute in some way to healthcare inflation, which always seems to be growing at least three times faster than overall inflation.

One obvious driver, however, that we don't talk about much is the more than 14 million people who work in healthcare. Healthcare is labor-intensive, and labor is the highest single budget item for most healthcare organizations, grabbing about 60% or more of the budget at hospitals. Compensating 14 million people doesn't come cheap.

Last week, Standard & Poor's Healthcare Economic Indices reported that the average per capita cost of healthcare services covered by commercial insurance and Medicare grew 6.19% over the 12 months ending in February. (The Consumer Price Index showed that overall inflation grew by 2.1% for the same period.) What's interesting is that the rate of growth in healthcare inflation has been steadily decelerating since it hit a high water mark of 8.74% for the 12-month period ending May 2010. Since then the rate of cost growth has declined by 2.5 percentage points.

"What appears to be moving the index? The answer appears to be employment," David M. Blitzer, chairman of the Index Committee at Standard Poor's, tells HealthLeaders Media.  "It is a reminder that this is a labor-intensive industry, which suggests that it is going to be very hard to tackle costs. Most labor-intensive industries tend to have prices that rise faster than the CPI. It is easier to get a faster computer to replace an older, slower one than it is to find a new doctor who is faster than the old one."

John Commins

John Commins is a senior editor at HealthLeaders Media.

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