How Inflation Can Affect Your Practice and Finances, Steps to Take Now
Disclosures: Bhatia and Mandell do not report any relevant financial information.
Over the past 12 months, a plethora of factors have pushed up the Consumer Price Index, the key indicator the Federal Reserve uses as a barometer of inflation.
In a 2021 column, we defined inflation as the general increase in the cost of goods and services, as well as a decline in the purchase value of money. A simple way to understand the root causes of this phenomenon is that too many dollars end up chasing too few goods.
In this month’s column, we expand on that discussion and explore how inflationary forces can impact the practice of medicine, as well as physician finances. Additionally, we discuss the precautions physicians can take now to protect their assets and position themselves to seize the opportunities of the new economy.
State of inflation, effect on economy
The consumer price index in March 2022 reached 8.5%, indicating that year-on-year prices for most consumer goods increased by 8.5%. The producer price index hit 11.2% in March, a sign that higher prices could still be on the horizon as producers were hit by higher price increases than those reflected on the consumer side.
David B. Mandell
One of the challenges of a rising inflationary environment is that it forces the Federal Reserve to raise the federal funds rate to dampen demand in order to bring the economy closer to its 2% inflation target. At the moment, Federal Reserve Chairman Jerome Powell has insisted that the feds will take a phased approach to raising rates while trying to have a “soft landing.” However, many who lived through the 1970s and 1980s, the last great period of inflation, remember how then-Federal Reserve Chairman Paul Volcker had to drive rates up to almost 20 % to control inflation – an action that led to a recession.
How inflation can affect practices
Whether in private practice or in hospital, there is no doubt that a rapidly rising inflationary environment can have negative consequences for healthcare providers. For starters, costs for employee wages, including ancillary vendors, and goods and services will continue to rise, compressing already thin margins. This margin squeeze, defined in economic terms as input costs rising faster than the sale of a product, could potentially lead to layoffs or human resources restructuring if employment costs for the firm become unsustainable. Such consequences could affect the quality of and access to the care provided to our patients.
One of the greatest challenges of modern medicine is that most healthcare practices and facilities today, with the exception of some concierge or out-of-network services, have limited or no pricing power in due to their dependence on insurance or reimbursement for services by third parties. Pricing power is defined as the ability to raise prices without reducing demand or losing share to a competitor. Unfortunately for most physicians, it is difficult to keep their reimbursements in line with current market conditions because insurance reimbursement is often beyond their control. Compensation for medical services is complex, but it is usually directly or indirectly related to the Medicare conversion factor (CF), the number of dollars assigned to a unit of relative value. The calculation of the FC is based on the general state of the economy, the number of Medicare beneficiaries and other regulations that can delay current market conditions by several years. Thus, in an inflationary environment, physician margins could be significantly reduced in the short term if the current accelerated pace of inflation does not diminish.
Steps to take now: your practice
For leading physicians who are running their practices or departments defensively in this era of rising costs, the most important thing you can do right now is maintain a healthy balance sheet. Excessive leverage is likely to increase debt service costs, and the viability of your business may depend on the ability to maintain positive cash flow during times of margin compression. Practice leaders should also explore ways to use new technologies to optimize efficiency and throughput while continuing to provide the same or higher level of care. Finally, it is imperative to maintain a quality medical workforce and possibly innovate in payment models to incentivize young physicians who bring unique value or skills.
Steps to take now: your finances
Managing your finances in a highly inflationary environment is one of the hardest things to do, as many asset classes can struggle. Consult your financial advisor for guidance and ensure they fully understand the current environment. From a personal balance sheet perspective, reducing debt costs, especially the costs of high-interest variable debt, such as credit card debt or personal loans, may be most critical. For personal investments, it should be understood that growth stocks, typically those with high price/earnings multiples, are frequently subject to multiple contractions in inflationary environments, which can cause stock prices to stagnate or decline. . Stocks of companies with pricing power, good balance sheets and low price-to-earnings ratios – usually the value breed of companies – may have the best chance of performing well. Other asset classes that hold up well against inflation include certain commodities, real estate, and inflation-protected Treasuries. Cryptocurrencies, like bitcoin (BTC) that have a finite number of coins to mine, can also theoretically hold up well against inflation, but BTC is often considered a high-risk investment by institutions and could be the first to be sold during market downturns.
Inflation, like it or not, is real and the extent of our current risks will not be known for many months. Either way, physicians of all ages should understand the effects of rising input costs on the overall economics of health care. Ensure you maintain a healthy balance sheet, both personally and professionally, and manage changing risk profiles within your investment portfolio to best position yourself and your practice for new opportunities .
Supplier prices rose 11.2% from a year ago in March, the largest increase on record. www.cnbc.com/2022/04/13/producer-price-index-mars-2022-.html
Seidenwurm DJ, et al. AJNR Am J Neuroradiol. 2014; doi:10.3174/ajnr.A3674.
What orthopedists need to know about inflation. www.healio.com/news/orthopedics/20210618/what-orthopedists-need-to-know-about-inflation
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Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon practicing at Northwestern Medicine in Warrenville, Illinois. He can be contacted at [email protected] or @DrBhatiaOrtho.
David B. Mandell, JD, MBA, is a lawyer and founder of the wealth management firm OJM Group www.ojmgroup.com. You should seek professional tax and legal advice before implementing any strategy described here. He can be reached at [email protected] or 877-656-4362.