Why inflationary challenges have been particularly challenging in purchased services categories.

Originally published in The Journal of Healthcare Contracting

Stronger consumer demand coupled with global supply chain and workforce challenges are driving inflation across every sector of the U.S. economy, including healthcare, said Mickey Meehan, chief operating officer, Conductiv® and Chaun Powell, group vice president, Remitra. And while the U.S. has been seeing and living with higher costs from the gas pump to the grocery store, there has been less discussion about inflation in the services sector.

Part of the reason for that may be due to the complexities and variabilities of purchased services and the invoicing of those services. For example, at one large IDN, the chief supply chain officer shared with Meehan and Powell that departments and hospitals nationally lack the sophistication to accurately predict the expense of a service based on complexities of the contracts, which can be 70 pages long and filled with holiday, weekend and surge pricing models. “Add to that inflationary up-charging, and it becomes increasingly apparent that technology-based solutions are more critical today than ever before,” they said.

This time last year, services inflation sat at 3%. This year in the U.S., services inflation has increased – albeit slightly – from 6.22% in June to 6.25% in July, and its share of overall inflation also increased, Meehan and Powell noted.

Today, hospital expenses continue to climb while margins shrink – the median change in margin declined 49.3% from June 2021. “This makes inflation particularly challenging to tackle in healthcare,” they said. “Broader economy-wide inflation has serious implications for providers that must absorb added costs out of existing budgets, which are already strained as a result of lost elective procedure revenue, and record-high outlays to attract and retain labor.”

What’s more, as expenses are rising, hospital payments aren’t keeping pace. CMS has adjusted the IPPS payment rate upward 4.3%, but the truth remains the update falls woefully short of reflecting the rising labor costs that hospitals have experienced since the onset of the pandemic, Meehan and Powell said. “This inadequate payment bump will only exacerbate the intense financial pressures on hospitals.”

Click here to gain insight into which services sectors have been hardest hit, and some possible solutions for supply chain teams to implement.