Economic Outlook for Q2 2024
Quarterly Economics Briefing–Q2 2024
Posted Date: July 29, 2024
Key Themes and Takeaways
NCCI consistently hears from stakeholders that medical inflation is a top concern, and we are responding with insights, data, and NCCI’s newly developed Workers Compensation Weighted Medical Price Index.
The WCWMI is constructed using monthly inflation indices to give a real-time look at how price changes are trending and is weighted to match workers compensation more closely than other indices.
The Medical Inflation Insights (MII) report provides a quarterly update on how a multitude of inflation metrics are trending while providing insights on how these trends could impact workers compensation.
Economic Outlook
The Workers Compensation Weighted Medical Price Index
Medical inflation is consistently a top industry concern. Publicly available inflation indices published by the federal government provide an advantage in tracking trends in medical inflation due to their near real-time nature. Previous NCCI research identified the Personal Health Care (PHC) price index, published by the Centers for Medicare and Medicaid Services (CMS), as the publicly available medical price index that most closely matches workers compensation.1 While the PHC closely matches the price changes that we monitor and can be impactful to the industry, it lacks the key advantage of real-time tracking of other public indices. To solve this, we constructed the Workers Compensation Weighted Medical Price Index (WCWMI).
1 Medical Price Index for Workers Compensation, Raji H. Chadarevian, ncci.com, October 16, 2017.
In this paper, we will walk you through the purpose of this new index, the components of its construction, and potential improvements for future iterations. Additionally, available the first month after each quarter end, our new Medical Inflation Insights publication will be available on ncci.com to keep you up to date on how medical prices evolved over the quarter and key takeaways for workers compensation.
Purpose
In 2024, our conclusions from 2017 still largely hold true: the PHC remains the best publicly available medical price index for workers compensation. The PHC does, however, have two major constraints for our purposes.
The first constraint is the frequency of reporting. The PHC is an annual measure of prices reported once per year and lacks the ability to follow trends in real time. Tracking pricing trends monthly allows for more information to assess whether changes in prices constitute a new trend or just normal noise in the data.
The second constraint is the lag in data reporting. The CMS reports PHC values late in the following year, preventing real-time analysis of pricing trends. This late reporting can also lead to surprises if trends change between release periods.
To solve both constraints, the WCWMI is a monthly index with similar construction to the PHC. One key difference, however, is the weighting of different types of care. The PHC is constructed using subcategory weights for overall healthcare spending in the economy while the WCWMI is weighted based on the distribution of spending in workers compensation medical claims taken from NCCI’s Medical Data Call.
Construction
Similar to the PHC, the WCWMI is constructed using components of the Consumer Price Index (CPI) and Producer Price Index (PPI) to best match each individual category of medical spending in workers compensation. The WCWMI can either be constructed using chain-weighting (floating basket) for deflating previous years of severity, or it can be constructed using current year weights for all years (fixed basket) to analyze trends in pure price changes.
Before diving into the construction of the index, two data limitations must be discussed. First, publicly available price indices track prices of care by location but not by type of procedure. As such, certain types of care that rarely show up in workers compensation, such as pediatrics and obstetrics, cannot be removed from the data. While price trends are close, they will never be perfect due to this limitation. Second, public inflation data is not collected at the state level, thus the WCWMI cannot be constructed for individual states.
| Construction of the Workers Compensation Weighted Medical Price Index (WCWMI) | ||||
|---|---|---|---|---|
| WCWMI Component | NCCI Weight | BLS Series Description | BLS Series ID | Baseline |
| Physician care | 40.00% | PPI: Physician Care | WPU511101 | March 2009 |
| Hospital outpatient care | 27.00% | PPI: Hospital Outpatient Care | WPU511104 | December 2008 |
| Hospital inpatient care | 13.00% | PPI: Hospital Inpatient Care | WPU512101 | December 2008 |
| Medicinal drugs | 7.00% | CPI-U: Medicinal Drugs | CUUR0000SEMF | December 2009 |
| Medical equipment and supplies | 8.00% | CPI-U: Medical Equipment and Supplies | CUUR0000SEMG | December 2009 |
| Home health and hospice care | 4.35% | PPI: Home Health & Hospice Care | WPU511103 | December 2008 |
| Nursing home care | 0.65% | PPI: Nursing Home Care | WPU512102 | December 2008 |
| NCCI Weight is shown for Service Year 2022 and BLS index values are without seasonal adjustment Sources: US Bureau of Labor Statistics; NCCI's Medical Data Call |
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For physician and hospital services, the two largest categories of workers compensation medical spend, the chosen proxy categories are sourced from the PPI. The PPI is a more expansive measure of prices for healthcare, incorporating changes in prices paid to health care providers by consumers and private insurers as well as public spending from Medicare and Medicaid. Fee schedules based on Medicare necessitate this expanded tracking of prices because the CPI accounts only for price changes paid by consumers, private insurers, and voluntary components of Medicare (Part B).2
2 “Measuring Price Change in the CPI: Medical care”, US Bureau of Labor Statistics, bls.gov.
For the categories of medicinal drugs and durable medical equipment, pricing data is sourced from the CPI. Reimbursement rates in workers compensation for drugs and medical equipment generally track with prices paid by consumers. Wholesale prices measured by the PPI for these categories track changes in production costs which follow different trends than end-user prices, making the CPI a better price proxy for workers compensation in these categories.
The “Other” category includes many different areas of spending such as long-term care, transportation, accessibility features for vehicles, and uncategorized spend. For simplicity in the initial construction of the index, we have used long-term care as the proxy for the “Other” category due to its importance in large loss and long duration claims. Long-term care includes nursing home care, hospice care, and home health care. For each subcomponent, we use the PPI for its broader tracking of prices from different payer types.
While the initial construction of the index focused on simplicity and ease of re-creation for the industry, future enhancements will be considered to increase accuracy in tracking changes to workers compensation medical prices. One refinement to consider is adjusting physician and hospital services categories to account for fee schedules. Using detailed subcategories of price changes by payer type, we can account for percentage of spend in fee schedule states and adjust for the specific level of fee schedule to get a more accurate tracking of price changes for these major categories of care. If there are any other future improvements that may be of value to the industry, please reach out.
Medical Inflation Insights
The WCWMI will be updated every quarter and released the first month after the quarter ends in our new Medical Inflation Insights report. Similar to our Labor Market Insights report, the Medical Inflation Insights report will track changes in inflation aggregates and detailed components as well as key takeaways from the data. In addition, the report will include a file with the index and its subcomponents as of that release date and the historical weights of each subcategory.
The WCWMI and Medical Inflation Insights report are both direct responses to a top industry concern with the goal of timely and frequent updates and analysis of medical inflation trends.