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The Escalating Impact of Health Insurance on Inflation


Sep 17, 2023

According to economists, health insurance is expected to act as a countervailing force for inflation for approximately a year starting in October. Since October 2022, health insurance prices have been steadily decreasing by around 3% to 4% every month. However, starting in October, the Consumer Price Index (CPI) for health insurance is projected to begin rising by just over 1% month over month.

Measuring the price of health insurance is challenging for economists because direct consumer costs, such as monthly insurance premiums, are not included in the Bureau of Labor Statistics’ (BLS) calculations. This is due to the variation in benefits and risk factors across different insurance contracts. The BLS indirectly measures health insurance inflation based on profits, using profit margins as a proxy for consumer prices. These calculations are updated annually in October.

Andrew Hunter, a deputy chief U.S. economist at Capital Economics, suggests that health care prices, as measured by the CPI, are starting to rebound. The significant decrease in health insurance prices since October 2022 has contributed to the economic downturn. However, Mark Zandi, chief economist at Moody’s Analytics, notes that other indicators remain stubbornly low, and the CPI for medical insurance is expected to begin increasing by just over 1% month-on-month for a year starting from October.

The Covid-19 pandemic has led to a surge in health insurance companies’ profits as consumers continued to pay premiums while limiting their visits to doctors and hospitals for elective procedures. However, in 2021, consumers began utilizing their insurance more frequently, resulting in insurers paying out more claims and reducing their gross profits compared to the previous year. As a result, the monthly inflation rate for health insurance has decreased. The BLS’s updated calculations will reflect insurers’ stronger profits in 2022, potentially affecting future CPI updates.

The U.S. Federal Reserve has been aggressively raising interest rates since the beginning of last year in an effort to combat persistently high inflation. While the annual inflation rate has significantly decreased from its peak during the pandemic, it remains above the target level. If inflation is sustained at high levels, economists speculate that the Federal Reserve may raise borrowing costs again.

When assessing inflation trends, policymakers tend to focus on measures that exclude food and energy prices due to their volatility. This measure, known as “core” inflation, would require consistent monthly core CPI readings of approximately 0.2% to return to target. Health insurance, which is subtracted from the core CPI by around 3 basis points per month, will undergo changes in October. It is estimated that health insurance will add over 1 basis point to the monthly core CPI, and over the past year, it has reduced the core CPI by more than 0.2 percentage point. However, Zandi believes that next year’s increase will be less than 0.1 percentage point, which is relatively small in the overall context of inflation but significant in the pursuit of every basis point.

By Editor

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