As economic risks shift from inflation toward the labor market, the Federal Reserve has begun the process of normalizing interest rates. While inflation is certainly lower than a year ago, that doesn't mean that inflationary risks are dead, either now or in the future. One stark lesson of the past few years is that inflationary risks should not be underestimated. To combat inflation risk going forward, policymakers should expand the anti-inflationary toolkit beyond simple monetary policy tools and engage in a comprehensive policy effort to limit the risk of inflation reacceleration. There are particularly important sectors of the economy where targeted policy from policymakers can meaningfully put downwards pressure on inflation.
One such area is healthcare, where the federal government has an outsized influence. Government spending is expected to reach 51% of total healthcare expenditures in the next decade. Given its outsized role in healthcare, the federal government can meaningfully use its authorities to lower the trajectory of healthcare costs. Aside from the direct impact these have on federal costs, past research has identified instances where equitable cost reductions reverberated in the private healthcare sector as well. Healthcare services comprise a large share of the consumption basket, with a weight of 13% of core Personal Consumption Expenditures (PCE).
Changes in the growth rate of healthcare prices can, therefore, substantially impact the overall inflation rate. For example, rapid healthcare cost growth placed upward pressure on inflation in the early-to-mid 1990s and 2000s, whereas cost control measures in the late 1990s and 2010s helped keep overall inflation down. While healthcare cost growth has been relatively low in recent years, with healthcare PCE price growth averaging less than 2% over the last 15 years, there is no guarantee this will continue in the future. The Congressional Budget Office's baseline budget projections see faster healthcare spending in coming years, driven mostly by increases in per capita spending. Most recently, surging healthcare prices resulting from changes in Medicare payment policies in 2021 led to a tripling in healthcare's contribution to core PCE inflation.
The federal government should use its bargaining power in Medicare to limit the growth of healthcare costs. We have previously looked at how Congress could constrain costs in hospital services by implementing site-neutral Medicare payments. Policies like site-neutral Medicare payments not only limit inflation directly by reducing the growth rate of prices paid by the federal government but there is also a knock-on effect of improving the bargaining power of private payers for healthcare services. The macroeconomic benefits go beyond lowering inflation: lowering healthcare costs growth promotes other macroeconomic goals by reducing the cost of hiring workers, allowing for lower unemployment, higher wages, and higher productivity.
Employ America is proud to launch our healthcare program. Through this program, we will examine the role of equitable healthcare cost control measures in limiting inflation and promoting full employment and productivity.
Our series will kick off with a report synthesizing the macroeconomic benefits of healthcare reform that targets cost reduction and utilization with a strategic look at the 1990s. We will then dig deeper into site-neutrality by releasing a set of blog posts that measure the inflationary impacts of site-neutral policies in the commercial and public sectors. Our series will close with a review of Medicare Advantage and a report on the forward outlook of healthcare reform as an adequate tool to manage inflation, maintain full employment, and increase productivity.
