The consumer price index (CPI) for medical care has been advancing more than 4.0%— and as much as 4.7%—per year since 2000, and is projected by Global Insight to maintain near-3.5% gains through 2016. In contrast, the overall CPI for goods and services has grown between 1.6% and 3.6% over the last six years; we forecast near-2.0% average increases over the next 10 years. This suggests that growth in medical costs will continue to outpace overall inflation, with medical expenditures grabbing an expanding percentage of overall U.S. GDP.

The CPI for medical care uses a constant-quality, constant-quantity market basket to measure average price movements. The weighting structure for the index's components are derived from the Consumer Expenditure Survey, which is updated every two years.

Two major components define the CPI for medical care: services and commodities. Medical-care services are the larger of the two, in both sample size and expenditure level. Services are then further broken down into three categories: professional services, hospital and related services, and health insurance. The Bureau of Labor Statistics is currently exploring the feasibility of publishing the health insurance component as a separate CPI index. The high expected growth rates in medical-care services can be attributed to the strong 4.0–5.2% annual increases in group health insurance projected over the next 10 years.

Medical-care commodities encompass two categories: prescription drugs/medical supplies and nonprescription drugs/medical supplies. Prescription drug prices will see a slight slowdown in growth over the next few years, as patent protection on a number of name-branded drugs has expired, and new patented drug development is lacking. Price gains in medical supplies have also experienced a slowdown.

With annual growth of 4.8–5.1% between 2001 and 2005, the medical services component easily outpaced the price gains in medical-care commodities. And this trend will continue. Therefore, we expect the CPI for medical care to keep climbing more quickly than the overall CPI, driven largely by big gains in the CPI for medical-care services, particularly health insurance and hospital and related services.

by Francesca Holzheimer

www.globalinsight.com

www.wmrc.com