II. Medical Care Price Trends

The Medical Care Component of the Consumer Price Index

This section examines the rise in medical care prices through the years and in the recent past. The main source of information is the Consumer Price Index (CPI) prepared by the Bureau of Labor Statistics. The BLS obtains prices on a wide variety of items customarily purchased by urban wage earners and clerical workers, weighting these items by their importance in a typical city worker's family budget. Among the items for which prices are obtained are several types of medical and surgical procedures and hospital services, as well as a variety of drugs. These medical care components of the CPI constitute the major source of data on medical care prices in the United States.

Some limitations of these data should be borne in mind in interpreting their movements. First, there is the quality problem, common to all price indexes. A visit to a doctor, or a day in the hospital is not a homogeneous product. The quality and effectiveness of care received by a patient in a day or a visit varies tremendously. Since the quality and effectiveness of care are undoubtedly rising over time, the medical care component of the CPI overstates the actual long-run increase in medical care prices. Moreover, the average consumer of medical care is not as interested in the price of a visit or a hospital day as he is in the total cost of an episode of illness. The cost of a particular illness may be rising faster or slower than the price index for medical care, depending on the amount, quality, and price of the medical care provided.

Medical Care Prices and Total Consumer Expenditures

Consumer expenditures for medical care reflect both the quantity of care purchased and its price. Price increases reduce the amount. of care that can be purchased for a given dollar expenditure.

In 1950, consumer expenditures on medical care were 4.1 percent of disposable income. By 1964, the ratio had risen to 5.7 percent. Demographic factors and changes in consumer preferences (in part, the result of the improved quality of medical care) undoubtedly contributed to this increase. But a major factor in rising expenditures for medical care has been the rise in medical care prices.

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If, in the period 1950-64, the Medical Care Index had increased at the same rate as the Consumer Price Index, instead of over twice as fast, the quantity of medical care purchased in 1964 would have cost $19.7 billion rather than $24.8 billion. This would have represented about 4.5 percent of income after taxes.

The relatively rapid rise in medical care prices has resulted in an increase in the proportion of income devoted to medical care and a probable reduction (over what would otherwise have taken place) in the quantity of care consumed by the public.

Trends in the Medical Care Price Index

Both the Consumer Price Index and its medical care component have been rising continuously for 25 years. Their rates of increase, however, have differed. Since the end of World War II, medical prices have been increasing considerably faster than consumer prices generally, as the following decade figures show:

Except for drugs and prescriptions, the medical care index is made up entirely of services. Since World War II, the prices of services have generally advanced more rapidly than the prices of goods. But the prices of medical care services have risen even more rapidly than those of other services, especially in the last 10 years.

Percentage Increase in Service Components of the Consumer Price Index

Over the two decades since World War II service prices in general doubled, while medical service prices rose 129 percent.

Components of the Medical Care Price Index

Just as the total Consumer Price Index is made up of many goods and services, so the Medical Care Index is a composite of medical care items whose prices change at widely differing rates.

For example, there have been wide disparities in price movements among services provided by different kinds of physicians, especially in the recent period. In the year ending in June 1966, pediatric fees rose about 21⁄2 times as fast as obstetric fees. Among hospital charges, the daily service charges for hospital rooms went up 7.7 percent; operating room charges, 6.5 percent; and the charges for a diagnostic X-ray (priced to represent in-hospital ancillary services), only 2.5 percent (table 1).

The Recent Acceleration in Medical Care Prices

Between 1960 and 1965, medical care prices rose fairly steadily at between 2 and 3 percent per year-a slower rate of increase than in the 15 years following World War II. In 1966, however, the Medical Care Index increased 6.6 percent-the largest annual increase in 18

years.

An acceleration in medical prices occurred in the first half of 1966 and was intensified in the second half, as quarterly figures clearly show (table 2).

The 1966 acceleration affected both major components of the Medical Care Index-hospital charges and physicians' fees (table 3). Physicians' fees, which had been rising about 3 percent per year in the period 1960-65, went up 7.8 percent in 1966. This was the biggest annual increase since 1927 (the earliest date for which the physicians'

Table 1.-Medical Care Price Index: Annual Percent Changes by Type of

Source: U.S. Department of Labor, Bureau of Labor Statistics, The Consumer Price Index.

fees index is available). Hospital daily charges, which had been rising about 6 percent per year between 1960 and 1965, went up 16.5 percent in 1966-the largest annual increase in 18 years.

The rise in hospital daily charges was especially sharp in the second half of 1966-11.5 percent as compared with 4.5 percent for the first 6 months. In contrast, physicians' fees increased 3.8 percent in each half of 1966.

Medical care prices have been rising faster than other prices throughout the postwar period. The rapid increase in medical care prices in 1966 is at least partly a reflection of the widespread inflationary pressures in the economy. The rate of increase in the Consumer Price Index for 1966 was 3.3 percent-the largest in 15 years.

Table 2.-Consumer Price Index: Quarterly Percent Increases

Table 3.-Consumer Price Index: Percent Increases by Type of Component