Health Care Costs Are Soaring, So Why Does the CPI Show Falling

By Mike Shedlock of Mishtalk

Let’s compare what the BLS says to an annual survey from KFF, a healthcare research nonprofit organization.

A family’s health insurance costs nearly $24,000 this year after the biggest increase in more than a decade.

The Wall Street Journal reports Health Inflation’s Big Hike This Year, in Charts

The cost of employer health insurance rose this year at the fastest clip since 2011, according to an annual survey from KFF, a healthcare research nonprofit. The 7% jump in the cost of a family plan brought the average tab to nearly $24,000—more than the price for some small cars.

Workers’ average payment of $6,575 for those plans was nearly $500 more than last year.

Inflation Has Hit Health-Insurance Costs

Inflation in the economy spiked in 2022. It hit health coverage this year because hospitals tend to renegotiate fees with insurers only every few years, so the increases they sought to cover their own costs are now in turn affecting premiums.

Employers and workers may see similar boosts in 2024, according to benefits consultants.

The KFF Employer Health Benefits Survey was conducted between January and July 2023. It included 2,133 employers that responded to the full survey.

Average Annual Change

I looked at those charts and said Whoa!

I track the CPI every month and medical care services is one of the things I follow.

A BLS Fact Sheet explains Measuring Price Change in the CPI: Medical Care, emphasis by the BLS.

The medical care index is one of eight major groups in the Consumer Price Index (CPI) and is divided into two main components: medical care services and medical care commodities, each containing several item categories. Medical care services, the larger component in terms of weight in the CPI, is organized into three categories: professional services, hospital and related services, and health insurance. Medical care commodities, the other major component, includes medicinal drugs and medical equipment and supplies.

CPI Year-Over-Year Percent Change Medical Care

I have been watching that chart in disbelief ever since medical care services went negative in May of 2023.

I did not comment because I had no hard data.

Seeing that KFF chart, I immediately knew what’s going on. The explanation is below. See if you can figure it out while I go over the numbers.

Medical Care Services Year-Over Year

• May: -0.1%
• June: -0.8%
• July: -1.5%
• August: -2.1%
• September -2.6%

Medical care services consists of Professional Services, Hospital Services, and Insurance.

CPI Weights for 2022

• Medical Care Commodities: 18% of Medical Care
• Medical Care Services: 82% of Medical Care
• Professional Services: 45% of Medical Care
• Hospital Services: 28% of Medical Care
• Insurance: 9% of Medical Care

What’s Going On?

• The relative importance of medical care only includes out-of-pocket expenditures, its share in the CPI is smaller than its share of gross domestic product (GDP) and other national accounts measures. GDP includes reimbursements that are fully paid for by public sources and employers, increasing medical care’s share of GDP.
• Employer paid portions of insurance premiums and fully tax-funded medical care (such as Medicare Part A and Medicaid) are not considered out-of-pocket, and therefore not used in weighting the indexes.
• Even though insurance premiums are an important part of consumers’ medical spending, the CPI does not directly price health insurance policies. In a direct approach, we would track the movement of insurance premiums, holding constant the quality of insurance, and use these price relatives to build the Health Insurance index. However, the CPI has been unable to consistently control for changes in quality such as policy benefits and risk factors. Price change between health plans of varying quality cannot be compared, and any quality adjustment methods to facilitate price comparison would be difficult and subjective. As a result, we developed an indirect approach called the retained earnings method.

The items above are direct quotes from the BLS medical fact sheet, emphasis mine.

I was aware of those points for a long time but could not come up with better numbers until I saw the chart from KFF.

Brief Synopsis of What’s Going On

• Costs paid by Medicare and Medicaid do not factor into the calculation.
• Costs paid by your employer do not factor into the calculation.
• Quality of care does not factor into the calculation.
• Insurance is imputed.
• Aging demographics means an increasing number of people are on Medicare, Medicaid, and disability. As a result of demographics alone there are negative pressures on the CPI medical care care services index.

This is how the cost of hospital care is up 4.7 percent year-over-year (undoubtedly understated by a mile) while the overall category of Health Care Services is allegedly down 2.6 percent from a year ago.

The same synopsis applies to medical care commodities as well. These undercalculations are no small matter, dampening the reported CPI at a demographically increasing rate.

Even Shorter Synopsis of What’s Going On

It’s total BS from the almost appropriately named BLS.