Note: This analysis was updated on July 26, 2023, to include new data.
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. Since 2021 prices for many consumer goods and services have increased faster than usual, with overall inflation reaching a 4-decade high in mid-2022.
In this brief, KFF uses 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, overall prices grew by 3.0% in June 2023 from the previous year, while prices for medical care increased by only 0.1%. This is unusual, as growth in health prices typically outpace inflation in the rest of the economy.In June 2023, medical prices grew by 0.1% from the previous year, below the 3.0% overall annual inflation rate. Click To Tweet
Medical care prices have generally grown faster than overall consumer prices
Since 2000, the price of medical care, including services provided as well as insurance, drugs, and medical equipment, has increased by 114.3%. In contrast, prices for all consumer goods and services rose by 80.8% in the same period.
The consumer price index for all urban consumers (CPI-U) measures the U.S city average change in prices consumers pay for goods and services. 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 47% of the medical care index.
BLS used new expenditure weights to calculate the CPI starting from January 2023 and will continue to update the weights annually. Previously, BLS updated CPI weights once every two years using two consecutive years of consumer spending data. CPI weights will now be calculated each year using one year of spending data for greater accuracy.
In June 2023, prices rose 3.0% across the economy from the previous year, compared to 0.1% 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 0.1% between June 2022 and June 2023, the prices of many other consumer goods increased by significantly more.
Prices for all goods and services increased by 3.0%. Overall annual price growth excluding medical care was at 3.2% and core inflation (excluding food and energy) was at 4.8%. Many essential goods and services saw larger increases. Food prices grew by 5.7% and electricity costs grew by 5.4%. Many other household items, such as rent, have also seen larger price increases in the past year than medical care. Gasoline was the fastest-growing essential household expense in 2022, reaching a peak inflation rate of 59.9% in June 2022. More recently, as of June 2023, gasoline prices have declined by 26.5% from the same month last year.
Some health prices increased faster than others in the past year
Prices for hospital services and related services (4.2%) – both inpatient (3.7%) and outpatient (5.7%) – as well as for nursing homes (3.3%) rose faster than for prescription drugs and physicians’ services (3.1% and 0.5%, 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 index 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 a decrease of -24.9% in June 2023. But the health insurance CPI presents data that is almost one-year lagged, so it is not representative of current price changes. In fact, the health insurance CPI through September 2022 reflects insurers’ margins in 2020, as they paid lower medical claims than in a typical year. However, insurers likely saw lower margins, on average, in 2021 and 2022 than they had been in the first year of the pandemic due to returning utilization.
Regardless, with a 9% weight of the total medical consumer price index, health insurance brought the overall medical CPI up during most of 2022 and is now exerting downward pressure. As a result, medical care prices grew at their slowest rate in decades in June 2023.
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.
Since June 2009, the CPI-U for medical care services has risen by 49.6%, while the PPI for health care services has increased by 35.3%. 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 administratively. The private insurance health services PPI has risen by 24.9% since June of 2014, compared to 13.8% for Medicare and 17.2% for Medicaid in the same period. The overall health services PPI increased by 20.9% since June 2014.
During the public health emergency, Medicare provider reimbursement for COVID-19 treatment was boosted by 20.0%, which explains part of the increase in the Medicare PPI in 2020.
Typically, medical inflation outpaces inflation in the rest of the economy. But in 2023, medical prices are growing at a similar rate as in past years, while prices in some other parts of the economy are still growing much more rapidly than in the past.
After the onset of the COVID-19 pandemic in 2020, high consumer demand and supply chain disruptions, stemming from production shortages, accelerated inflation for most consumer goods. The Russia-Ukraine War put additional pressure on the global energy market. While inflation has declined in some sectors, particularly gasoline, ongoing labor shortages and sustained demand continue to keep non-medical services inflation high.
As inflation pushes wages upward, health worker wage increases also put upward pressure on medical prices unless hospitals and other providers can find ways to operate with fewer staff 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 most are tied to the plan or calendar year. A KFF review of preliminary ACA Marketplace insurer rate filings for 2023 found that insurers noted systemic broad-based price and utilization increases, as well as utilization increases amidst the waning pandemic, as the main factors driving the increase. The KFF Employer Health Benefit Survey found 2022 employer-based health insurance premiums were similar to 2021. With consolidation among hospitals, employers and private insurers often lack leverage in negotiating prices. In a tight labor market, employers may be reluctant to pass health premium increases to workers and press health plans to moderate healthcare price increases.
Public payer prices are set by the federal and state governments on an annual basis. Medicare updates payment rates annually, reflecting increases in operating costs and wage growth, among other factors. For Medicare inpatient hospital payment rates, the Centers for Medicare and Medicaid Services finalized a 4.3% increase for fiscal year 2023 (October 2022 to September 2023) and has proposed a 2.8% increase for fiscal year 2024. The agency estimates the payment rate increase will result in a $3.3 billion increase in payments to hospitals. The American Hospital Association has stated the proposed payment inflation of 2.8% for 2024 is unsustainable, given overall inflation. It is possible public payers’ administrative rate setting may spillover to private health plans’ payment policies and moderate overall healthcare price increases.
For now, inflation in the broader economy continues to outpace medical price increases. It remains to be seen whether, or to what extent, these recent trends will hold moving forward.
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.