Counting the Cost: The impact of inflation on Europe’s health care market
What impact has the high inflation of the past 18 months had on growth in Europe’s health care market? Have for-profit operators been able to pass on cost increases to payors? And have patients paying out of pocket, in the face of rising prices and squeezed budgets, cut back at all? In this first instalment to answer these questions, we focus on the for-profit hospital, imaging and nursing home sectors in France, Germany and the UK.
Click here to go to HBI Intelligence . We have updated our hospital, imaging and nursing home reports for the UK, France and Germany, including updated for-profit growth rate figures and market sizes.
UK
The UK has been particularly badly hit by inflation in the past 18 months, as the impact of Russia’s invasion of Ukraine on energy and food prices was compounded by newly erected post-Brexit trade barriers. Inflation peaked at 9.6% in October 2022 and is down to 6.4% as of July 2023 (compared to 5.3% in the Eurozone), according to the government’s most comprehensive price index.
For most health and care operators, the biggest increase in costs has come from wage increases, thanks to government schemes which limited the increases in energy bills.
“You had wage inflation as high as 10% at the peak, but it’s coming down to around 7%, meaning we haven’t had a full year effect and it’ll be less than the headline rate,” an expert on the UK’s private health care sector tells us. “The NHS pay deals awarded pay increases of 5-7%, pushing 7% in most cases. The private sector usually follows that quite closely.”
Have they been able to pass those cost increases on to payors?
Outsourced NHS activity is subject to a tariff that adjusts in April each year. Richard Bradford, chairman of InHealth, the UK’s largest private imaging group, explains to HBI: “Most operators in the UK will have got a tariff-based increase in April 2023, based on CPI or RPI related data going back six to nine months before. In diagnostics there are something like 500 different tests, each one is subject to a different increase. It won’t be 8% in most cases; new innovations are taken into account and operators are expected to absorb cost increases to a certain extent with efficiency savings. So overall it’s probably below 8%.”
Expenditure by the NHS on care delivered by for-profits is therefore probably decreasing slightly in real (inflation-adjusted) terms, as outsourced volumes aren’t currently growing much (volumes for outsourced elective care for the 2021/22 period were roughly the same as for the 2019/20 period, after a big dip in 2020/21 due to Covid): with tariff increases not quite keeping up with inflation and volumes not growing, real-term expenditure will be falling.
But for most for-profit operators this is being made up for by strong growth in privately funded care. Volumes for privately funded and privately delivered elective care were 10% higher in 2021/22 compared to 2019/20, as increasing numbers went private to avoid NHS waiting lists. On top of this, out of pocket funding has been growing especially strongly, as prices for this are much more flexible, since they are not subject to NHS tariffs or the bargaining power of private insurers.
“For care funded out-of-pocket it might even be able to do above-inflation price increases in some cases, because the demand is so strong,” says Bradford. “Insurers, on the other hand, are generally fairly inflexible.”
Out of pocket expenditure was the only funding source to grow above inflation in 2022: according to OECD data, out of pocket expenditure was 10.4% higher in nominal terms in 2022 compared to 2021. According to data from the Private Healthcare Information Network, out of pocket-funded inpatient admission volumes only grew 3.5% in 2022 across England. This suggests that the 10.4% growth in out of pocket expenditure was driven much more by price increases than by volume growth, and that operators have been able to more or less fully pass on cost increases for out-of-pocket funded care. As one of our sources put it: “Self-pay prices go up because it’s a much more elastic market. The NHS isn’t delivering so people will pay more for self-pay.”
PMI expenditure grew by 6.6% in nominal terms in 2022. But this was driven largely by increasing volumes: inpatient volumes for PMI patients grew by 5.2% across England in 2022. This suggests PMI reimbursement rates only grew by 1-2% in 2022, well below inflation and also below most NHS tariff increases.
The nursing home sector is one area that is seeing increases in reimbursement rates above the overall level of inflation, both on the publicly-funded and on the privately-funded side. A UK care home operator tells us: “This year local authorities have increased fees by 8-10% (in Scotland only 6%). But pay fees are already below the cost of care. So increasing it means the differential between reimbursement and the cost of care has been reduced.”
Conclusion: For-profit hospital operators are likely having to absorb at least half of their cost increases across the board, as PMI reimbursement rates and NHS tariffs haven’t kept pace with inflation. By itself this would mean falling revenue in real terms, but growing volumes in the private-pay sector means total revenue growth for the UK’s for-profit hospital sector was probably around 8% in nominal terms in 2022 (and so 0% in real terms). This nominal growth rate will likely be maintained in 2023 and possibly even 2024, even as inflation comes down, as volumes get a boost from the government’s plan to increase outsourcing.
Other areas of the UK’s for-profit health care sector may be seeing higher growth, due to greater volume growth. The UK’s imaging sector is likely seeing revenue growth of at least 10%. In the elderly care sector total revenue is likely growing at around 12%, thanks to above-inflation fee increases as well as some volume growth (although this rate will come down somewhat in 2024 as the large increase in fees won’t be repeated).
France
In France the situation is very different. The country has been less heavily hit by inflation, thanks to most of its electricity coming from nuclear energy rather than fossil fuels. Inflation peaked at 6.3% in February 2022, and was down to 4.3% in July 2023.
And in France most health care expenditure comes from the statutory insurer, whether the care is being provided by public, for-profit or not-for-profit entities. So the key factor is to the extent to which statutory insurance tariffs have been adjusted in light of inflation.
“Tariffs are only increasing by 1-2% in France,” Marc Kitten, partner at strategy consultancy Candesic, tells us. “So operators are having to absorb most of the cost increases for things that are reimbursed by the statutory insurer.”
Total health care expenditure only grew by 2.1% in nominal terms in France in 2022. With inflation at 5.2% for the year, this means France’s health care sector received a real-terms cut of around 3% in aggregate.
The fact that growth in expenditure was well below inflation is a direct consequence of the fact that statutory insurance tariffs haven’t kept pace with inflation. Expenditure by the statutory insurer increased by just 1.8% in nominal terms in 2022.
Private pay, on the other hand, grew 3.8%. “Cost increases have been passed on to some extent in the private sector,” says Kitten. “For things which are paid for out of pocket, operators have been fairly aggressive in passing on cost increases.”
The elderly care sector has received a tariff increase of 5.1%, almost exactly the rate of inflation over 2022 (5.2%).
Conclusion: Most parts of France’s for-profit health care sector will be getting a real-term cut as the statutory insurer expects them to absorb cost increases. Larger operators that have a strong position in the market may be able to make up for this with volume growth. Ramsay Sante, the country’s second largest for-profit hospital chain by revenue, reported organic revenue growth of 4.8%, almost keeping pace with inflation.
Germany
Germany has been harder hit by inflation than France, but not as badly as the UK. It peaked at 8.8% in October and November 2022, and was down to 6.2% by July 2023. Hospitals have been particularly badly hit due to rising energy, staffing, and rent costs.
An expert on the German health care sector told us: “In the inpatient sector, statutory payors will negotiate with the doctors association next year, so there’s a gap and a lag. The inpatient market is growing at a lower rate than inflation. Revenue is growing about 3%, inflation is around 6%. Wages are still low, energy prices are up.
“I would assume inflation will drop to around 3% in 2024. Revenue growth will stay at 3%. It would take us back to 2022 in real terms. In 2022 there was the same situation where inflation was high due to the incredible increase in energy prices. Energy has since come down a bit – but only a bit. Inflation was not fully compensated by tariff increases either.”
Another source tells us: “Overall German providers are facing high inflation with inadequate rises in the tariff, meaning everyone is getting squeezed. Public tariffs have not gone up in line with inflation. It was roughly 3-3.5% in inpatient sectors and 2-2.5% in the outpatient sector. The DRG reform is stuck with the public sector reform, which is still pending, so you pretty much have flat development with no price increase at all.
“Inflation in costs is probably 4-5% for providers, but the the top line is only increasing by around 2-3%. So you have a 2% margins squeeze, which is usually covered by volume increase, but if your volume isn’t growing you get the full hit from the increasing cost. Some sectors are even worse hit by inflation, such as hospitals, which are reliant on energy and rent.”
Despite most parts of the outpatient sector seeing lower tariff increases, overall revenue growth may actually be higher for outpatient than for inpatient activity, due to organic volume growth as the country attempts to divert shift towards being more outpatient-heavy.
And the situation is a little better for some outpatient sub sectors. An imaging operator tells us: “For imaging in Germany the tariffs are set at the inflation rate of the previous year, so we will get full compensation in 2024.”
Looking at overall expenditure figures, the situation appears to be the reverse to France. Expenditure by the statutory insurer increased 6.3% in 2022 (almost keeping pace with the rate of inflation, of 6.9%, for the year), because overall tariffs have increased by around 3% (as opposed to 1-2%), and the sector also saw some modest growth in volumes. PMI expenditure was also up 4.1%. But out of pocket expenditure actually fell 3.9% in 2022, suggesting that demand for out of pocket-funded care is much more price and income sensitive than in the UK or France.
Conclusion: Most parts of the German for-profit health care sector are having to absorb around half of their cost increases as tariff increases generally aren’t keeping pace with inflation. The hospital sector is receiving slightly higher tariff increases than the outpatient sector, but the effect of this is probably not as significant as the effect of changing volumes: because the German health care sector is currently pivoting towards outpatient care, the outpatient sector may be growing slightly even in real, inflation-adjusted, terms, whilst the the for-profit hospital sector is probably getting a 2-3% real-term cut.
We would welcome your thoughts on this story. Email your views to Martin De Benito Gellner or call 0207 183 3779.
