Medical Inflation

Indices of Medical Inflation—Annual Growth, percent

Medical inflation as measured by the Personal Health Care deflator (PHC) is forecast to accelerate through 2020. An alternate indicator of medical inflation, the health care component of the Personal Consumption Expenditure index (PCE-HC) is forecast to increase similarly through 2020.

Medical Inflation: Projected to Rise Above 2% in 2020

Sources: Centers for Medicare & Medicaid Services; Bureau of Economic Analysis; Moody’s Analytics

Changes in Medical Payments

Medical benefits account for about 60% of total benefits in workers compensation. Medical inflation has been muted, growing at 1.4% a year since 2014 as measured by the Personal Health Care price index (PHC). Average medical payments per active claim have grown marginally faster at 1.8% annually, or 7.5% over the five-year period ending in 2018.

While there is significant variation across states (see Exhibit 1), payments for facility services (hospitals and ambulatory surgical centers) contributed 6.6% of the 7.5% overall increase in medical payments per claim from 2014 through 2018. Facility services comprised 40% of medical benefits in 2018. Payments for physician services, comprising 38% of 2018 medical benefits, contributed just 1.1% of the increase in medical payments per claim over the same period. Prescription drug payments, making up just under 10% of 2018 medical benefits, were responsible for a 1.8% decrease in medical payments per claim. The Consumer Price Index for prescription drugs increased roughly 15% from 2014 through 2018, which suggests that the negative contribution of drugs to expenditure growth is the result of reduced drug utilization.

Changes in Drug Payments

Average drug payments per active claim decreased 15.4% from 2014 through 2018, the only major category of medical expenditures to have fallen over this period. The main driver of lower drug payments was diminished opioid use resulting from significant changes in opioid prescription practices. Considered alone, changed drug utilization in those claims involving opioids contributed a 20.5% reduction to average drug payments for all active claims from 2014 through 2018. This contribution is divided almost equally between opioid and nonopioid drugs at about 10% each. Lower usage of opioids also reduces the need for nonopioid drugs to treat opioid-related adverse events such as nausea and constipation. Partially offsetting the big decrease in drug payments in opioid claims was a 5.9% increase in drug payments for all active claims contributed by claims which involved no opioids. Other claims whose prescription drug experience has no specific drug identification contribute minimally. Exhibit 2 shows the decomposition of changes in drug payments per active claim for individual states.

Exhibit 1 - Change in Medical Payments per Active Claim 2014-2018