Overall inflation has not yet flowed through to the health sector

Medical care prices and overall health spending typically outpace growth in the rest of the economy. Health costs 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 common goods and services.

Using the CPI, we show that in July 2022, overall prices grew by 8.5% from the previous year, while prices for medical care increased by only 4.8%. 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 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 faster than prices in the overall economy. Medical prices have grown 110.3% since 2000. In contrast, prices for all consumer goods and services rose by 71% in the same period.

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In July 2022, prices rose 8.5% across the economy from the previous year, compared to 4.8% for medical care


While medical care costs have grown faster, they have also grown more consistently year-over-year than prices in the overall economy, which 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.

In July 2022, however, prices rose by 8.5% across the economy from the previous year, compared to 4.8% growth in prices for medical care.

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


While medical care prices increased by 4.8% between July 2021 and July 2022, the prices of many other consumer goods increased by significantly more.

Overall price growth was at 8.5%, and core inflation (excluding food and energy) was at 5.9%. Many essential goods and services saw larger increases. Food prices grew by 10.9% and electricity costs grew by 15.2%. Many other household expenses, such as rent and clothing, 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 44% since July 2021.

Hospital and nursing home prices increased faster than those for other types of medical care in the past year, though far less than overall inflation


Prices for hospital services – both inpatient (3.9%) and outpatient (3.5%) – as well as for nursing homes (4.5%) rose faster, while drugs and physicians’ services had lower price increases (2.8% and 0.8%, respectively). (The prescription drug price index is based on a certain basket of retail prescription drugs and does not immediately reflect the introduction of new, high-priced drugs.) Rising average employee wages and continued staff shortages in the wake of the pandemic may put upward pressure on operating costs.

Medical care CPI also includes price indices for medical equipment (6.6% in July 2022 over prior year) and health insurance administrative costs and profits (20.6%). The health insurance CPI is almost one-year lagged and does not represent current period health insurance cost changes. Health care use declined in 2020 due to COVID-19, which subsequently led to an increase in insurers’ margins.

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 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 51%, while the PPI for health care services has increased by 32%. Services included in this chart include hospital, physician, and other professional and facility care costs. 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. Private insurance health services PPI has risen by 21.4% since June of 2014, compared to 12.2% for Medicare and 12.8% for Medicaid in the same period. Overall health services PPI increased by 17.8% since June 2014.

Year over year health services PPI picked up in recent months for private insurance with 4.1% in July 2022 over the same month in 2021, compared to 0.6% decrease for Medicare and 3.4% increase for Medicaid.

During the public health emergency, Medicare provider reimbursement for COVID-19 treatment is boosted by 20%, which is at least 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 some other parts of the economy are growing much more rapidly than in the past. Health worker wage increases may put upward pressure on medical prices unless hospitals can find ways to operate with fewer staff.

Health prices are generally set in advance, administratively or via private insurance contracting, so there may be 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 preliminary ACA Marketplace insurer rate filings for 2023 showed a median premium increase of 10%. Insurers in the 13 states and District of Columbia noted systemic broad-based price and utilization increases as the main factor driving the increase.

Because public payer prices are set by the federal and state governments on an annual basis, there may be 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 $2.6 billion increase in payments to hospitals. The American Hospital Association had stated the proposed 3.2% increase in 2023 payments was not sufficient, given overall inflation.

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

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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