Health Insurance Inflation WTF

We all care about inflation. Prices are going up and it’s coming out of everyone’s pocketbook. The government issues reports that tell us what inflation is, but sometimes it feels like the government numbers don’t match our real lives. For instance, how much has health insurance gone up?

There are several ways to measure inflation, but the one most people know best is the Consumer Price Index (CPI). The CPI is published by the Bureau of Labor Statistics (BLS), and is measured by a basket of common goods and services that is used for reference. Prices are measured each month, and the change in those prices is the thing that is reported in the news as “inflation”.

Some things are easy to measure, like the price of milk and eggs. Others are harder. One of the oddest items tracked in the CPI is the cost of health insurance.

Medical costs in general are complicated to track. They are paid for by a combination of consumers, employers, Medicare, Medicaid, insurance companies, and even by health care providers (who may have to eat the cost of care for uninsured patients.) For measuring inflation in health care costs, the BLS generally focuses on “out of pocket” costs to consumers. So far so good.

If you didn’t know anything about it, you might assume that the CPI would measure the change in health insurance premiums. As most people know, those premiums can be high and have gotten higher. But that is not how health insurance inflation is measured.

Health insurance has its own special section in the CPI documentation. Hold on to your hats. Inflation in health insurance is measured not by the changes in premiums but by changes in the earnings of the insurance companies! The health insurance CPI calculation was changed in October 2023. Before that the category actually measured health insurance premiums.

The justification is that eggs and milk are commodities. A gallon of milk is basically the same as any other gallon of milk, so one price of milk is the same as any other price of milk. But health insurance can cover all kinds of different things, and can cover them for people who have completely different risk profiles. Therefore, you can’t measure one premium against another, or the premium in month against a premium in another month. The BLS also wanted to take any increase in the cost of medical care out of the increase in premiums, since the cost of medical care is calculated separately. And in the United States there is another problem. A significant portion of health insurance premiums are paid by employers, and are not an out of pocket cost to the employees. and some companies pay an lot of that cost and others pay little, so looking at employee costs is not quite right either.

As soon as they changed the calculation they ran into a problem. Health insurance company profits were skewed by the aftermath of the pandemic. During the pandemic profits were high because elective procedures weren’t being done, and some of the cost of COVID care was being borne by the government. After things returned to normal, so did health insurance profits. Early reports showed health insurance costs going down because insurance company profits were down, when any consumer knew premiums were going up. So the BLS had to alter the calculation they use to “smooth” the results, making the calculation even more arcane.

Does this better measure health insurance inflation? It depends on who you are. If you are a consumer who thinks that increasing health insurance premiums are a source of inflation, maybe not.