Why This Counts: Medical Care Services in the CPI

The U.S. Bureau of Labor Statistics is best known for our monthly job and inflation reports. We also publish data on many other topics, ranging from how Americans spend their time and money to workplace injuries and the growth of entrepreneurship. My new blog series, “Why This Counts,” will explain why we conduct our surveys and how people can use the data at work and home. I hope this series will take the mystery out of our data and make our work come to life for both new and advanced users.

In Tuesday’s Consumer Price Index release, one interesting item caught my eye. The seasonally adjusted index for medical care services declined 0.2 percent in February 2015, its first decline since November 1975. That’s a long time ago—I was still in college then! Historically, the medical care services index has tended to increase more sharply than the overall price level.

This seems like the perfect time to define “medical care services” in more detail and explain why we measure this index.

First, the basics. The Consumer Price Index (CPI) measures the average change over time in prices paid by consumers for a market basket of goods and services. The CPI affects nearly all Americans because of the many ways it is used, from making changes in the federal income tax structure to cost-of-living wage adjustments for millions of American workers.

One important part of the CPI market basket (that is, the set of goods and services we price for the CPI) is medical care. Reflecting actual spending patterns, medical care now accounts for about 8 percent of the market basket for the CPI for all urban consumers (CPI-U). We call this share of the market basket its “relative importance,” and we use these shares to weight price changes as we calculate the average price change. Medical care in the CPI is broken down into medical care commodities (mostly prescription and nonprescription drugs) and medical care services.

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Medical care services is the larger of the two components, representing over three-fourths of the medical care weight and about 6 percent of the entire CPI market basket.

Exactly what does the CPI price in medical care services? The largest components are hospital services and physicians’ services. Also included are dental services, services by other medical professionals, eyeglasses and eye care, and nursing homes.

In other words, the medical care services index in the CPI reflects the cost to consumers not only of trips to the doctor’s office or to the hospital, but also of trips to the dentist, psychologist, or chiropractor, or even buying a new pair of glasses or staying in a nursing home.

Not surprisingly, medical care has a long history in the CPI, although the composition of the index has changed over time. In the 1930s, when medical care represented only about half the weight it does now, the medical care part of the CPI included specific entries like castor oil, tonsillectomies and, quaintly, “house visits” by doctors.

Like other CPI data, prices for medical care services are collected monthly in a sample of metropolitan areas across the country. Of course, collecting medical care prices isn’t as simple a matter as collecting prices for some other goods in the CPI, such as bananas or gasoline.

Collecting these medical care prices allows us to accurately track medical care spending patterns.

What should we make of this month’s decline in the medical care services index? My staff often says that “one month does not make a trend.” Nevertheless, even with the recent slowdown in the pace of medical care services inflation this number is clearly unusual. So, we need to keep watching over the coming months to see if this is the start of a new trend or a one-time occurrence.

2 comments on Why This Counts: Medical Care Services in the CPI

  1. Ethan Zimmer says:

    This column misses some important aspects related to the measurement of medical care prices, namely:

    The role of insurance features such as co-pays, deductibles, co-insurance and premiums.

    The role of employer- and government-paid medical expenses.

    The difficulty in adjusting for quality changes.

    As a consumer, the changes in my expenditures are almost completely driven by these factors and have almost nothing to do with the measured inflation in the CPI.

    All of these factors make the measurement of medical inflation the weakest part of the CPI index, to the point where it is almost unusable. At 8% of the total index, I am concerned that the issues in the medical component might pollute any conclusions drawn from the total index.

    I believe it is important for the BLS to be clear about what it is they are (and are not) measuring. There is a link in the column to http://www.bls.gov/cpi/cpifact4.htm, but neither this column nor that link discusses the usability of the medical component given all of the issues. Do these numbers tell me the change in the amount a doctor is charging, or the amount the doctor is actually getting, or the amount that I am paying for a doctor’s visit? Do they tell me the change in total consumer expenditures, or change in the amount paid for the same level of services as the prior period? Can I see in the pharmaceutical component the impact of major drugs going off-patent?

    Unfortunately, I don’t see any easy solutions. All of these issues are incredibly difficult and a satisfactory solution may not exist, even ignoring data collection problems.

    1. BLS Commissioner says:

      Thank you, Mr. Zimmer. Estimating medical care inflation is a challenge and the choice of which approach to use can be quite difficult. Our current methods for the distinct purpose of measuring inflation at the consumer level are summarized at some length in the link in the post. Our CPI public information staff would be happy to address any specific questions you have and can be reached at 202-691-7000.

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