How Is Medical Inflation Measured? And Why Should I Care?

It should come as no surprise that medical costs and wage levels are two of the key components behind workers compensation. Increasing medical prices, also known as medical inflation, can have a significant effect on rates/premiums, profits, and benefit levels.

In this NCCI technical paper, “Medical Price Index for Workers Compensation,” we explore the differences between commonly used Medical Price Index (MPI) alternatives, and encourage the industry to consider using a recently developed methodology outlined below called the Personal Health Care Index (PHC).

A Fresh Approach to the Medical Price Index

When it comes to measuring medical inflation, or the rate at which medical prices increase annually, the Consumer Price Index (CPI) and Producer Price Index (PPI) are the most commonly used indicators. We’ll elaborate more on these indices, but while both have elements relevant to the world of workers compensation, neither one is a perfect fit for every situation. The PHC represents a unique approach that is worth exploring.

Let’s take a closer look at the CPI, the PPI, and the PHC as they pertain to workers compensation.

A Tale of Three Perspectives

CPI: A good way to think of CPI is “from the consumer’s viewpoint.” In other words, it’s what a consumer pays for a predetermined basket of goods and services, such as transportation, food, or healthcare. It’s calculated by measuring annual price changes for each item in that basket and averaging them by the share weights of each item in the consumer’s base year expenditure.

Since consumers do not bear the burden for WC claims, the CPI may not be a great benchmark for measuring the growth of WC medical costs over time. At best, it’s an approximation based on broad medical inflation trends from the perspective of the final consumer.

PPI: The PPI, on the other hand, is from the provider’s perspective. It represents an average over time of what a provider is paid for producing a product or providing a service. This includes revenue from all consumers or users of that provider’s service—health insurers, WC insurers, and auto insurers, to name a few.

The PPI is more closely related to the medical component of WC claim costs, but the methodology for constructing the PPI does not quickly respond to changes in medical utilization trends. Plus, it does not measure the price of prescription drugs.

PHC: The PHC is a unique combination of multiple indices that helps paint a more complete picture of the price changes of personal healthcare. The composition of the index is a set of medical services that more closely mirror medical services typical in workers compensation. In other words, the basket of goods looks more like that of the medical services for treating an injured worker. And the index can be “chain-weighted”—meaning it can approximate year-over-year changes that reflect an evolving mix of services, especially as people change their utilization of medical and prescription services.

How Much Do the Three Perspectives Differ?

This chart illustrates the differences in price index growth between the three MPI methodologies, over six years, based on a 2010 baseline. Please see the technical paper for additional detail.

How Can WC Stakeholders Leverage PHC?

The PHC can arm carriers with more accurate and valuable information that they can then use to help determine rates, develop predictive models, and assist in negotiations with provider networks and pharmacy benefit managers (PBMs). It can also help better prepare carriers to determine reserves needed for long-tailed claims and to develop an economic outlook.

For regulators, the PHC provides a better measurement of year-over-year changes in price within a state and at the macro level. It can also help track fee schedule adequacy, ensuring it is keeping up with inflation to guarantee access to care. Ultimately, this method will provide a better understanding of why WC loss costs need to change over time.

The PHC may help employers, too, by showing why the loss costs/rates might change from one year to the next.

Want More Information?

You can also learn more about all three indices—CPI, PPI, and PHC—by visiting the Bureau of Labor Statistics online.

​This article is provided solely as a reference tool to be used for informational purposes only. The information in this article shall not be construed or interpreted as providing legal or any other advice. Use of this article for any purpose other than as set forth herein is strictly prohibited.


"The Personal Health Care Service (PHC) has a set of services that mirrors what we see in workers compensation. "

Raji Chadarevian
Director—Medical Regulations & Informatics