CPI-M plays an astonishingly small role in CPI. Despite being nearly 20% of GDP, it is only 8.5% of CPI. However, this month, it got some of the credit for the higher than expected print of 8.3% YoY. August is not likely to be the last of it. Price changes in health care occur only once a year as part of changes to benefit design. (CPI in health care mostly measures cost-sharing paid by individual health care consumers.) Medicare prices reset each October and commercial is generally updated effective in January.
The YoY % change in CPI-M crossed the 5.00% threshold in August, a first since 2016, excluding the COVID period. The post-ACA period was marked by a tight labor market in response to elevated demand for services due to new insurance coverage options and mandates. High deductible plans became more prevalent to limit premium increases where they could.
Today we have a similar dynamic. Labor is in short supply. Demand for services has increased, due to a combination of factors that include delayed care and poor lifestyle choices in the work-from-home era. Sicker patients translate into higher acuity and more revenue. Even when high acuity patients do not consistently show up, the health care system can be very nimble when it comes to identifying every code with a revenue opportunity necessary to preserve margin.
What is going to be different this time is that insurers are being pressed hard to increase reimbursement to accommodate increases in salaries and wages that have gone up much more than in the wake of the ACA. As the reimbursement goes up, it takes cost-sharing and thus, CPI-M with it. Health insurance which makes up just 9% of the weights in CPI-M will increase also as premiums rise - any where from 10-20% if the ACA exchange plans offer any glimpse at the future.
As demand destruction applies its influence to the prices of gasoline, restaurant meals and apparel, health care CPI will be the laggard, providing small but nonetheless upward pressure on the index well into next year.
Let me know if you have any questions.
Emily Evans
Managing Director – Health Policy
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