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Maximize Value June 24, 2022

Hospitals Want Price Hikes. How Should Insurers Respond?

Partner, Health Services, Oliver Wyman
Key Takeaway
Insurers, hospitals can use negotiations about price hikes to enter constructive discussions on some mid and long-term goals. #healthcare #inflation #OWHealth

It started with one call. Then others came in from health plan executives who have been approached by providers in their networks seeking payment increases — in some cases, double digit increases. The executives wanted to know if this was an anomaly in their markets or part of a bigger national trend.

While there’s no comprehensive database tracking these asks, we have enough anecdotal evidence from clients — combined with data points on growing provider costs — to suggest that this trend is going to intensify over the coming months. In fact, it is very likely to extend into 2023 contract negotiations, which will have an impact on health plans submitting their own rate filings to regulators, as well as consumers and employers as they consider coverage options and benefit designs for the coming year.

But these renegotiations don’t have to add to the historically tense relationship between payers and providers. Instead, payers can use this period as an opportunity to enter constructive and collaborative discussions with their provider partners to focus on some mid- and long-term goals.

The Pain is Real

The financial strain COVID-19 put on hospitals and health systems is well documented. During the early days of the pandemic, hospitals were forced to shut down elective procedures and allocate most of their beds to COVID-19 patients. That pinch on revenue-generating procedures caused operating margins to slump from a pre-pandemic average of negative 1% to negative 7.4%, according to one study. Congress appropriated $185 billion through various COVID-19 relief spending measures that helped stabilize hospitals, but studies found that those funds were unequally distributed across the sector. The emergency funding ended last December.

Although utilization is normalizing across most of the country, a recent Oliver Wyman analysis showed that it will be a couple of years before there’s a full recovery to pre-pandemic levels. On top of that, providers are now confronted by escalating costs. The American Hospital Association reported that drug costs grew by 36.9% on a per patient basis and medical supply expenses increased 20.6% compared with pre-pandemic levels. But labor is where hospitals are seeing most of the cost pressure. Hospital labor costs at the end of 2021 were 19.1% higher than pre-pandemic levels, according an American Hospital Association analysis, and increased 57% at the height of the Omicron surge in January 2022. Importantly, the Centers for Medicare and Medicaid Services wage inflation index, which relies on historical data, boosted hospital payments by 2.7% in fiscal 2022 while overall labor costs rose 6.5%.

Those national trends are playing out to varying degrees market by market. One Oliver Wyman client expects to see employed cumulative labor cost growth of ~7-9% over the next five years, depending on job role. That’s on top of the more than $50 million they spent on contingent labor during the past year. We are also familiar with providers who raised wages for allied professionals by as much as 30% over a 12-month period, which was done out of necessity to keep various service lines staffed appropriately. Another data point from a health system in contract negotiations with nurse unions are settling on pay hikes of 20% over four years (~5% per year), down from the 30% that the unions sought.

Seeking Price Increases

To offset the financial pinch, providers are raising prices and turning to insurers for increased payments. The Wall Street Journal reported that national for-profit chains HCA Healthcare and Universal Health Services were seeking price hikes between 7.5% - 15%. They are not alone. Major health systems in Vermont are reportedly seeking mid-year rate changes. Ascension Wisconsin is increasing list prices for room and board, too. This pattern seems consistent in nearly every geography, as we are seeing similar requests in markets where we serve payer and provider clients, with rate increases ranging from 7% to as high as 28%, compared to the usual 3% to 5%.

The impact of these requests is trickling down to insurers in many ways, with an early indicator being the preparation and filing of 2023 Affordable Care Act rates. In some instances, state regulators have told us that they expect insurers to build significant increases into their ACA exchange rates.

Considerations for Payers

What does all this mean for payers? We’ve identified five main considerations:

  • Acknowledge the pain: These are not arbitrary requests. Hospitals have borne the brunt of the pandemic and now must contend with inflationary pressures. While it is reasonable for them to seek payment increases, those requests need to be justified and backed with data. Also, one payer shouldn’t bear a greater burden than their competitors as competitive pricing and healthcare affordability remain important.
  • Address supply and demand: Even before the pandemic, more care was moving to lower-cost ambulatory settings, as well as the home. The increased use of telehealth services during COVID-19 accelerated that migration. As the industry continues to rethink how care is delivered — and paid for — payers and providers should have meaningful discussions around capacity and what services can and should move out of the hospital and whether bed capacity needs to be reduced in some markets.
  • Redesign work: Several provider clients are discussing ways to have each department redesign their workflow and how work gets done, use increased automation, and rethink their economics. This catalyst to redesign care is something payers should encourage of providers so as not to band-aid unsustainable models
  • Better information sharing: Payers can use the renegotiation period as an opportunity to build better information sharing systems with providers. They should look for ways to improve the timeliness of data flowing from providers, including more real-time access to data and timely prompts on admissions.  As Payers look to give some increases, they should consider tying those increases to improvements in care and connectivity.
  • Boosting targeted programs: These negotiations are also a chance for payers and providers to improve collaboration around specific programs. For instance, payers could require providers to use some of the increased payments to enhance behavioral health services or specific social determinants of health programs that the payer has identified as a dire need based on member and community data.

Tammy Tomczyk, FSA, MAAA, FCA, Partner, Oliver Wyman Actuarial Consulting; and Noah Kest, Consultant, Oliver Wyman, contributed to this article.

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