Boca Raton, FL – NCCI recently announced the release of the Q3 2017 edition of its Quarterly Economics Briefing, which examines the current state of the economy and implications for workers compensation insurance.
Key takeaways from this edition include:
- 2017 and 2018 employment growth is expected to be lower than in recent years
- Low unemployment has not translated into faster wage growth
- Interest rates have increased this year and are expected to rise more in 2018
- Beginning with this issue, NCCI will use the Personal Health Care (PHC) deflator to measure medical inflation
Highlights from the report on Medical Inflation and the introduction of the Personal Health Care (PHC) deflator:
Annual inflation in the medical Consumer Price Index (medical CPI) accelerated in 2016 to 3.8%, largely reflecting price increases for health insurance and physicians’ services. However, Moody’s expects the medical CPI’s rate of growth to slow this year to 2.7% before increasing next year to 3.2%. Both forecasts are down one-tenth of a percentage point from those reported in the June 2017 QEB. As discussed in that edition, this year’s slowdown in medical inflation, as measured by the medical CPI, is due to a slowing in the rate of price growth for prescription drugs. However, Moody’s still expects the medical CPI to increase at a faster pace than the general CPI, which is forecast to increase 2.0% annually both this year and next.
Personal Health Care Deflator
Beginning with this issue of the Quarterly Economics Briefing, NCCI presents the Personal Health Care (PHC) deflator as an alternative measure of medical inflation to the medical CPI. The Center for Medicare & Medicaid Services constructs the PHC deflator using different methodology than the medical component of the CPI. Forthcoming NCCI research shows that the PHC is more closely aligned with the mix of medical services experienced in workers compensation than the CPI.
There are two main causes for the differences in the price indices. Both causes stem from the fact that the CPI focuses on costs paid out-of-pocket1, whereas the PHC deflator uses price changes across all payers for key categories of medical spending, including hospital services and physicians’ services.
- By using all payers and different sampling, the PHC deflator measures lower price increases for hospital services and physicians’ services
- The weight on each spending category in the PHC is benchmarked to the comprehensive National Health Expenditures rather than the Consumer Expenditure Survey
In both areas of divergence, the PHC deflator appears to be a better match for workers compensation than the medical CPI. The medical CPI measures much higher inflation for hospital prices than the series used by PHC, and researchers have suggested this partially reflects self-pay consumers whose experience does not reflect price growth for workers compensation. Despite these pricing differences, the medical CPI puts less weight on hospital spending than PHC and more weight on prescription drug spending. Physician’s services weights are similar. Analysis of the NCCI Medical Data Call reveals that the PHC’s weighting better matches workers compensation.
How much does this matter? The PHC deflator has consistently estimated medical inflation lower than medical CPI. These differences between indices have ranged from 1.0 to 1.6 percentage points since 2012. This gap is a little high by historical standards, but the average difference in the two measures has averaged 1.0 percentage points since 1998. For long-tailed medical expenses, differences in projected levels and changes in inflation can compound to significantly change expected costs—medical inflation has increased 38% in the past 10 years by CPI compared with 25% by PHC.
PHC’s measured price growth is forecasted to be higher in 2017 and 2018 than it was in the last few years, rising to 1.6% and 2.3%, which would reverse a steady decline from 2009 through 2015. This pattern matches the general path of the medical CPI, but the measured decline in price growth occurred somewhat more smoothly in PHC. PHC category weights are updated every year, while CPI’s weights are changed biannually, which can lead to jumps in the medical CPI. One drawback of PHC’s methodology is that PHC price indices are only updated annually, with almost a full year’s lag. NCCI estimates that the forthcoming publication of 2016 PHC price growth will be close to the projected value of 1.3%.
For the complete briefing, click here: NCCI: Q3 2017 Quarterly Economics Briefing
1In context of medical expenses, “out-of-pocket costs” as defined by CPI include medical care paid for by insurance if the consumer paid directly for insurance premiums, but not taxpayer-funded insurance such as Medicaid.
Forecasts are derived from Moody’s Analytics.