In our latest In the Booth podcast, we are pleased to have Bridgette Cassety from Meritain Health broker engagement, Michael Ciarrocchi, Meritain Health Chief Market Development Officer and David Bauer, CVS Executive Director, Enterprise Strategy discussing medical inflation and how we are addressing it.
Welcome to another edition of in the booth. My name is Bridgette Cassety and I'm head of broker engagement here at Meritain Health. And I'm thrilled to be joined today by Michael Ciarrocchi, who is our AVP and chief market development officer here at Meritain Health. And Michael's joined me previously for some editions of in the booth. But for the first time we also have David Bauer. Who's an executive director for Aetna enterprise strategy and Michael, it is so good to have you back. And David welcome. We're certainly thrilled to have you be joining us. And I know the topic that we're going to discuss today is on everyone's mind and it crops up in a whole lot of conversations is I'm talking to our distribution channel partners and customers across the country. So because we don't have a lot of time together today, I thought I'd just go ahead and jump in with our conversation around medical inflation. And certainly that is something that's top of mind for everybody on a daily basis, whether you're at the gas pump or you're at the grocery store, but how does inflation impact healthcare costs? That's sort of what's on everyone's mind. So, Michael, I thought I'd have you kick us off and maybe share your perspective first around how is the overall economy really impacting healthcare costs as we look ahead into the future year?
Yeah, thanks, Bridgette. And, and again, thanks so much for doing this. It's great to be back with you and to join David in the conversation. You know, it's interesting. For sure the impact on medical cost inflation is something that our customers are feeling acutely, but I actually, I think one of the things that's so important is to think about it in the context of just general inflation that we're seeing in the economy. Not only our employees and, and customers, and they're certainly feeling it in the context, as you say, at the pump and in the grocery store and in restaurants and throughout of all their purchases because that impact is occurring on the supplies and the cost of goods sold that all of our employers are facing. You have this sort of double whammy where customers are not just concerned about the impact around medical cost inflation, but they're also so keenly aware of the impact of inflation on their ability to deliver value to their own customers.
And so what you have is this really challenging dynamic, where they're trying to make sure that they can navigate through these incredibly high cost, but then also to have to have their employees deal with their own medical cost increases really creates challenges. And we hear from a lot of our customers and consultants and brokers who are looking for some unique solutions that we're excited about and excited to talk about, but I would tell you the dynamic and the challenge that creates right now for employers is pretty remarkable. And then it's, as you shift focus a little bit into medical cost inflation, there are a number of different drivers. Some of them immediate, some of them are a little more forward looking and a actually, David, I think that'd be a great area for you to talk about why don't you talk a little bit about kind of what we're seeing from the broader enterprise perspective about what's driving some of those increased medical costs and some of the ways that it's plays itself in to the world of TPA customers.
So I think first of all, we should talk about the immediate versus what's going down the pipeline. And I think the important thing to look at is when we think about inflation, the overall economy that Mike talked about, it's roughly eight, eight and half percent. If you compare that to medical inflation, it's actually quite a bit less, I think, roughly four, four and half percent. And so the question is why is there that gap? And if you thinking about what's happened over the last 20 years, it's actually been the opposite where medical inflation has been roughly three and a half percent over the last 20 years or so, whereas overall inflation, the economy has been closer to 2%. And so when you think about medical inflation, which is, you know, four, and percent's actually not that much more than what we've seen historically, right? It's just about a percentage, just dynamic, much more lagging, as opposed to the broader economy.
So a health plan perspective where we negotiate prices far to the future. If you think about our, our price negotiations, where we're doing so now into 23 at, beyond some of those effects really lag, and the same is true, both on the government side and the private payer side. And so you, you probably saw that recently there was some announcements from TMS that there was going to be a shift in, in Medicare, I think four, four and half percent shift. You, you're also seeing some similar requests on the private side. And so we know that right now. We're not feeling that, but we're probably going to be very soon. So if you think about hospital provider negotiation, I know that we've been getting a request, you know, seven, 10, 15%, and that's, that's consistent across the board. So when you think about the impact of those negotiations naturally overall going to hit out pocketbooks in a major way. The thing that mitigates that a little bit at least from a payor perspective of those contracts tend to be longer term three year, two year contracts. And so those things tend to roll. But, but the fact is that inflation is probably not stopping. We'll get into some of those factors. But the, the inflation is overall not stopping. So we'll probably continue to see that trend go on.
I think that's really great perspective when you talk about, you know, the historical cost of inflation when it comes to, you know, purchasing healthcare, but how that sort of gets mitigated. When we look ahead to long term contracts, what are the things that you think are largely going to contribute to that? As we, as we look ahead into what's happening in the overall economy, what are the biggest things that you think are contributors?
Yeah. So if you think about it and I'll just focus mostly on kind of what we're seeing, the, the areas that have seen the biggest growth, even so far, our largely hospital services, you know, both inpatient and outpatient, as well as in home and nursing homes. And so not surprisingly, those things are associated more with higher labor cost, higher supply costs. And as Michael talked about at the top, those are the areas that are really driving inflation, the overall economy, not surprisingly, those are also the things that are going to be driving inflation on the medical side as well. One of the things that we see with hospital prices is it's coming both from labor side and the supply side, if we think about the labor side, the biggest impact is going to be some of the dynamics that happened, you know, when we went into to COVID and now, as we are getting into, if we can call that a post COVID world, the, the, the changes in the labor force, and we know across the board, the, the labor force tends to be very tight.
It's probably even more acute in the medical space. And so hospitals are raising labor rates to, to make up for that. I've seen something, you know, in the neighborhood of 20 or 30% in terms of labor costs compared to pre pandemic levels. And so that cost obviously has to be passed on somewhere because hospitals were already operating at such thin margin. You know, we, we know that even before the pandemic operating at one or 2% margin, now, I think I saw during the pandemic, it was closer to, to negative seven, 5%. So, so there's, there's got to be something that gives, and you'll see that happening, you know, as part of the, the provider negotiation, the other side of it is where it's moving a little bit slower is going to be in drug costs and physician services. And surprisingly, those are some of the areas that are probably not as impacted by the labor and supply charges. And so I think we'll see continue see more of a pull on that hospital side and we see anywhere else in the medical care.
And David, I think you're right. The labor shortage is real. Certainly our customers have felt that as well. And so how that sort of factors into this idea around medical inflation is certainly insightful. And, and I think that, you know, usually what we hear from our distribution channel is okay, but what can we do about it? Right. So, so we've done a great job of sort of talking about the challenge and what's contributing to it, but how do we address that together as, as good partners for our customers. So, Michael, I don't know if you want to offer some suggestions that, that you might have for our customers and or David, whichever one of you'd like to jump in first.
So, so one of the things I think Bridgette, that we see is we have to sort of reset the expectations. And one of the things that our brokers and consultants have, have vocalized to us, and is this sort of intensity of this new challenge that our customers are facing. And it's really sort of a, the culmination of everything that David talked about. So on the one hand you have the inflation that they're talking about on their own business, they have the forward looking concerns about medical cost inflation in terms of the impact on their health plan. And yet the labor market is so tight that some of the I'll call them lower hanging fruit. And I certainly don't mean to imply they were easy, but some of the decisions that might have been made historically about cost shifting that lever for CFOs and HR owner and, and business owners that really becomes difficult because shifting costs now to your employees really is, is not effective because all it does is it creates a perpetual problem in terms of labor shortage, right?
Employees do not want to bear more of a cost for benefit plans when there's plenty of other places that they can go and, and take a role. So it creates this really unique challenge. And that's actually an area that Meritain has really listened to and tried to be very forward looking and in terms of some of the solutions. So how do they look? They look at a number of different ways. The, the first piece is, is that Meritain is going to continue to leverage all of that TPA DNA that gives our consultants and customers all kinds of flexibility in terms of the way that they want to design their health plans that give them maximum control over what's unique for their particular culture. So one of the areas that we utilize a lot of that is point solutions. And so we have an entire center of excellence.
That's built around exploring external point solutions that employers can take advantage of and drop into in a very seamless way drop into their benefit plans. And, and that's something that we can provide some coaching and consulting with because we've had so many different experiences with what they, with what they look like. The other thing is, is that we notice that some, some parts of some different industries who are, are very focused on inflationary pressure may look to have things like more aggressive utilization management. They may want to have hyper customized plan designs by leveraging a lot of the tools that are available to, to drive members to lower cost higher quality providers. And that, again is one of the things that we maintain as a TPA that has a, a, a lot of flexibility. And again, gives, gives customers some really unique solutions right now in the midst of trying to, to navigate some things that are, you know, frankly, a lot of create that inflation pressure.
Finally, I think something that's really unique and, and David ask you to speak to us is one of the things that's so different about Meritain is by being part of the Aetna family and by broader extension, the CVS family, there's some pretty cool enterprise assets that CVS is thinking about that, that Meritain’s excited about accessing now and in the future that are looking to try and address not just the cost inflation component, but also how to meet members where they are in terms of, in terms of their in terms of their journey. David, you want, you want to talk at all about the, those, those assets.
Yeah. And, and I'll just, before I go there, I I'll step back. And, you know, I think I'll put a point on, on the point that you made in the question that Bridgette had asked around, you know, how people react to it and typically, you know, how costs are shift. And I think a lot of it, and I'll use a strategist favorite word, which is, it depends. Right. And I think it depends a lot on what the situation is for the employer. So I'll in broad terms, but if you think about industries like potentially technology industry, where you have some larger companies, they're still operating a fairly high margin, there is a large labor pool shortage. And they're really competing for that talent and they are less likely as Mike said, pass on labor costs, medical costs less likely to pass on the medical costs. Conversely, as we look at some of the smaller employers, you know, ones that are, are really seeing kind of their margins eroded by what's happening inflationary for the, on their side, they are likely to, to have to pass on some of those, or at least find some more economic ways to structure their plan.
And so when we think about the strategies that different employers are going to be taking on, it's really dependent on how what, what their situation is and how they respond to that . As Michael pointed out. One of the, really about Meritain is that it's set up to really be flexible to meet the, of types of employers, flexible from an economic perspective, to be flexible enough, to, to meet a number of different plan design needs and to, to be able to take in some of the great vendor solutions that are out there that I think address some of these pain points. Now I'll kind speak to the question that Michael asked me around assets. And I think that's, you know, a great example of some of those vendor solutions that, that we know the employers are increasingly thinking about are places that you can add additional benefits to their employees without necessarily layering on a bunch of costs.
So one of those examples is a program called Destination Behavioral Health. And this is a fairly new program. It's available in certain markets. We're continuing to expand it and it utilizes our CVS health hubs as a behavioral health access point, you know, using clinical social workers in the store to provide that coverage. And to me, I think that's a great example of solving a huge pain point that we're seeing in the market today for both employers and their employees. You know the access to behavioral health services. And I think it does so in a way that doesn't really add cost to the employer, which is obviously a win-win. So I think the thing that you'll see, you know, as we continue to look for ways to create differentiation, doing so even beyond the medical coverage through things like our integrated PBM offering with Caremark, which is even more so when we add in programs that drive down drug costs like prn rx and maintenance choice. And so I think things like that, right? Really giving us the ability to bring in the best of what we have across CVS, across Caremark, across Aetna, and across our retail businesses. I think that's really something that's going to be important for employers and their employees, in a time like this.
Yeah. And, and David, you, you mentioned those assets, we've seen a tremendous amount of interest from our customers, both for these solutions going forward. Some are in the future. One of the other ones to your point is the in markets where there is heavy density of CVS minute clinics and health hubs. And there are many of those across the country. Now the we've seen the ability to integrate the CVS health hubs and minute clinics right into the plan design. And that's, again, something that's only available through Meritain where customers now will have the ability for a low cost, no cost depending on their plan design minute clinic visit. And they, they show up at those clinics and they put show their ID card with Meritain’s logo on it, and instantly they're going to get access to that rate. So again, a really great way bridge for us to be thinking about not just what's unique about how we can solve those problems for customers, but to try and do it in a way that addresses inflation without putting additional constraints on some of their labor challenges.
And Michael, I think you're right, as I listened to sort of your thoughts and comments, both you and David in this conversation today, what I wrote down and really took away is that as a TPA, we can bring the best of the best we can bring the enterprise assets. We can bring a very prescriptive solution, but to always be forward thinking in order to meet our customers, demands is really what we're focused on. That very prescriptive approach that addresses is that addresses the challenges of our customers. And I think David, you're the one that pointed out, Hey, they're all a little bit different. They're all a little bit unique, but we want to meet them where we're at. And as an enterprise and as a TPA here at Meritain, we have the ability to do that. So I want to thank you both for joining me today, what a great conversation, you know, here at Meritain, we remain committed to developing strategies for our customers for every type of economic season. And we certainly shared some great insight into the challenge and how we can work to together to address that. So thank you. And I appreciate our listeners joining us again for another addition in the booth. And we look forward to joining us for the next time.