How does medical inflation compare to inflation in the rest of the economy?

Medical care prices and overall health spending typically outpace growth in the rest of the economy. Health costs usually represent a growing share of gross domestic product and many American families have seen the costs of health services and premiums grow faster than their wages. However, in recent months, prices for many consumer goods and services have increased faster than usual, with overall inflation at a 4-decade high.

In this brief, we use Bureau of Labor Statistics (BLS) data, including the consumer price index (CPI) and producer price index (PPI) to analyze prices for medical care compared to other goods and services.

Using the CPI, in October 2022 overall prices grew by 7.7% from the previous year, while prices for medical care increased by 5.0%. This is unusual, as health prices historically outpace prices in the rest of the economy. However, the relatively high rate of inflation seen in the rest of the economy may eventually translate to higher prices for medical care. This may lead to higher healthcare spending and steeper premium increases in the coming years.

Medical care prices have generally grown faster than overall consumer prices


First, we look at consumer price index for all urban consumers (CPI-U), which measures the U.S city average change in prices consumers pay for goods and services. The BLS medical care price index measures price changes for medical services, drugs, and equipment. For medical care, CPI measures total price changes, including both the costs consumers pay out-of-pocket and those insurers (public and private payers) pay to providers and pharmacies. While CPI measures total price changes, the index weights spending to match consumers’ out-of-pocket costs, including consumers’ spending at the point of care and on health insurance premiums. For example, physician and hospital services are 48% of the medical care index.

Since 2000, the price of medical care, including services provided as well as insurance, drugs, and medical equipment, has risen by 110.1%. In contrast, prices for all consumer goods and services rose by 71.3% in the same period.

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In October 2022, prices for all goods and services rose 7.7% from the previous year, compared to 5.0% for medical care


While medical care prices have usually grown faster than prices in the overall economy, they have also grown more consistently year-over-year.  Prices in the general economy can be more volatile (particularly for food and energy). Between 2001 and 2020, prices for medical care increased between 1% and 5% each year. Overall prices saw more volatility though generally increased at a slower rate than prices for medical care, until recently.

Medical care prices increased slower than prices for other consumer goods and services in the past year


While medical care prices increased by 5.0% between October 2021 and October 2022, the prices of many other consumer goods increased by significantly more.

Overall annual price growth was at 7.7%, and core inflation (excluding food and energy) was at 6.3%. Many essential goods and services saw larger increases. Food prices grew by 10.9% and electricity costs grew by 14.1%. Many other household items, such as rent, have also seen larger price increases in the past year than medical care. By far the fastest-growing essential household expense has been gasoline—prices for which have increased by 17.5% since October 2021.

Some health prices increased faster than others in the past year, though less than overall inflation


Prices for hospital and related services (3.4%),  for nursing homes (4.2%), and medical equipment (5.1%) rose faster than for prescription drugs and physicians’ services (2.2% and 1.8%, respectively).  The medical CPI is generally based on lagged data even more so than other CPI categories. For example, the prescription drug CPI does not immediately reflect the introduction of new, high-priced drugs.

The medical care CPI also includes a price index for health insurance. This measures retained earnings of health insurers – it is not a reflection of the premiums they set. The health insurance CPI fell from an annual increase of 28.2% in September 2022 (the all-time high) to 20.6% in October 2022. But the health insurance CPI presents data that is almost one-year lagged, thus is not representative of current price changes. Rather, the CPI through September 2022 likely reflects insurer margins for the 2020 calendar year.

Health care use declined in 2020 and into 2021 due to COVID-19. This subsequently led to an increase in insurers’ margins, as they paid lower medical claims than in a typical year. However, insurers were likely less profitable, on average, in 2021 and 2022 than they had been in the first year of the pandemic due to returning utilization. As a result, the health insurance CPI will likely invert in upcoming months after more recent data has been incorporated, and this could impact both the medical CPI and the total CPI.

Consumer prices have risen faster than producer prices for health services


Another measure of inflation, the producer price index (PPI), represents inflation from the producers’ perspective in both the public and private sector. The PPI for health services includes medical services (provided by physicians or other care providers) that are paid for by third parties such as employers or the federal government.

PPI considers changes in industry output costs with a focus on the actual transaction prices. CPI, by contrast, assumes consumers buy a similar bundle of goods and services and does not account for trade-offs consumers may be making in response to price changes. (For this and other reasons, the former typically understates, and the latter typically overstates, true inflation.)

Since June 2009, the CPI-U for medical care services has risen by 53.0%, while the PPI for health care services has increased by 32.8%. Services included in this chart include hospital, physician, and other professional and facility care prices. While drugs and medical equipment are included in previous CPI-U charts in this analysis, this chart measures CPI-U of medical care services specifically, and excludes drugs and medical equipment in both PPI and CPI-U measures.

Prices paid by private insurance generally outpace those paid by public programs


Generally, prices paid by private insurance are higher and rise more quickly than prices paid by public payers. Prices for private insurers are the result of negotiations between health systems and the insurance companies, while public payer prices are set through an administrative process. The private insurance health services PPI has risen by 21.8% since June of 2014, compared to 14.4% for Medicare and 14.2% for Medicaid in the same period. The overall health services PPI increased by 18.7% since June 2014.

The year-over-year health services PPI picked up in 2022 for private insurance with 3.4% growth in October 2022 compared to 0.7% for Medicare and 3.9% for Medicaid.

During the public health emergency, Medicare provider reimbursement for COVID-19 treatment is boosted by 20%, which explains part of the reason for the increase in the Medicare PPI in 2020.

Discussion

Typically, medical inflation outpaces inflation in the rest of the economy. But in 2022, medical prices are growing at a similar rate as in past years, while prices in many other parts of the economy are growing much more rapidly than in the past. Health worker wage increases put upward pressure on medical prices unless hospitals and other providers can find ways to operate with fewer staff (increase labor productivity) or cut other expenses.

Many health prices are set in advance, administratively or via private insurance contracting, so there is a delay in observable price increases. Some commercial rates are negotiated throughout the year, but many are tied to the plan or calendar year. Our review of ACA Marketplace insurer rate filings for 2023 showed a median premium increase of 4%. Insurers noted systemic broad-based price increases, as well as utilization increases amidst the waning pandemic, as the main factor driving the increase.

Because public payer prices are set by the federal and state governments on an annual basis, there is a lag in observable changes in health sector prices paid by public payers. Medicare uses indexing measures to update payment rates annually, reflecting increases in operating costs and wage growth, among other factors. The Centers for Medicare and Medicaid Services recently finalized a 4.3% increase in 2023 Medicare inpatient hospital payment rates, including for growth in operational costs. The agency estimates the payment rate increase will result in a $2.6 billion increase in payments to hospitals. 

At this point in 2022, medical price increases have not reached the inflation level in the broader economy. It remains to be seen whether, or to what extent, rising prices in the rest of the economy may eventually affect health prices (or the converse).

The Peterson Center on Healthcare and KFF are partnering to monitor how well the U.S. healthcare system is performing in terms of quality and cost.

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