Labor costs, new calculations could drive health care inflation higher

The cost of health insurance in the Consumer Price Index dropped by nearly 30% for the 12 months ending in July. However, economists expect that trend to change as soon as this fall.

“While quirks in how health insurance prices are measured and how medical providers set prices have led to a downturn in inflation in recent months, that trend looks likely to reverse,” Axios reported.

The price of health insurance in CPI calculations is not simply what a consumer or employer pays but is based on insurers’ retained earnings. Insurers calculate price by subtracting what they spend on health services for customers from the premiums they charge. If they end up paying out more than expected to prove care and profits fall, it shows up in CPI data as a drop in the price of health insurance.

The Bureau of Labor Statistics said last month that it will update its methodology for calculating health insurance, starting in October. The basis method will remain in place, but the agency will smooth the retained earnings data and update prices twice a year instead of once. Goldman Sachs economists expect that this change will mean that the costs of health insurance, instead of falling 4% a month, will increase 1% a month.

In addition, the price of treatment has been rising slowly, according to CPI data, with the cost of physician services up 0.4% for the 12 months ended in July. The price of hospital visits increased more, at 3.2%. Finally, labor shortages and rising wages among health care workers could filter through to higher prices as contracts are reset.

Read more: The future of employer-sponsored health care

“As many medical care prices are set in advance, the combination of higher wages, prior supply-chain disruptions to medical supplies and post-pandemic increases in utilization are still pushing up health care inflation,” JPMorgan economist Michael S. Hanson said. “While the outlook for medical inflation remains uncertain, on net we see risks skewed toward further increases that also contribute to a narrower wedge between CPI and personal consumption expenditures inflation.”