CPI revision provides more accuracy in the medical care services component - Consumer Price Index

Monthly Labor Review, April, 1988 by Ina Kay Ford, Philip Sturm

CPI revision provides more accuracy in the medical care services component

Expenditures dropped because of increases in employer-or government-financed payments; health insurance premiums are now allocated to appropriate commodities and services; unique categories for professional services and hospital and related services were created INA KAY FORD AND PHILIP STURM

The medical care services component of the Consumer Price Index (CPI) underwent several changes when the CPI was revised. We analyze these changes in expenditure weights, definitions, and structure of the component. We also discuss the methodology (pricing and treatment of quality changes) and data sources used for construction of the medical care services component.

In January 1987, the Bureau of Labor Statistics began publication of the revised Consumer Price Index (CPI). The major objectives of this revision were (1) to update the content and weights of the market basket of goods and services priced for the CPI; (2) to update the statistical sample of urban areas, outlets, and unique items used in calculating the CPI; (3) to improve the statistical methods used for computing a number of CPI components; and (4) to improve operating procedures. (1) This article describes the changes in consumption patterns, definitions, methodology, and data sources of the medical care services component of the revised CPI.

Expenditure weights

The expenditure weights for the CPI-U (all urban consumers) and CPI-W (urban wage earners and clercal workers) were developed from the Consumer Expenditure Survey. The review CPI expenditure weights are based on Consumer Expenditure Survey data for 1982-84 and replace the expenditures for 1972-73 that were used in the CPI from 1978 through 1986.

The Consumer Expenditure Survey is composed of two separate surveys -- an interview survey and a diary survey -- both conducted by the Bureau of the Census for BLS. The interview survey is used to collect data for expenditures that respondents can remember fairly accurately for periods of approximately 3 months. The diary survey is designed to obtain expenditure information for small, frequently purchased items that consumers tend to forget. Approximately 5,000 consumer units are contacted each year for each type of survey. (2)

All of the categories under medical care services had their expenditure weights calculated from the interview survey. These expenditures reflect both out-of-pocket expenses not covered by insurance and health insurance premiums paid by survey households.

The 1982-84 Consumer Expenditure Survey data showed that as a proportion of total consumption, the medical care services component was smaller than that of the 1972-73 survey. This decline results from changes in the ways consumers pay for medical care. Major medical expenses very frequently are partially paid for (and sometimes fully paid for) by health insurance, and many insurance premiums are fully or partially paid by empolyers or by government. Because the CPI reflects only consumer expenditures, employer -- and government-provided benefits are not included. In the decade between the two expenditure surveys, the numberof these third party-provided benefits increased. (3) During this period, the percentage of full-time workers convered by plans that were fully empolyer-paid rose from 71 percent in 1971-72 to 73 percent in 1982.(4) Thus, while medical care prices have risen at a rapid rate over the past decade, average consumer unit expenditures on medical care rose less rapidly due to employer-and government-provided benefits.

Table 1 compares relative importances for the old series, based on the 1972-73 Consumer Expenditure Survey, updated by price change through December 1986, to those for the current CPI, based on the 1982-84 Consumer Expenditure survey, updated by price change to December 1986. For some items, changes in relative importance between the old series and the current index arise not only from the previously mentioned changes in insurance coverage levels and distribution of permium payments between employer and employee, but also from definitional changes.

Health insurance defined

A number of definitional changes have been introduced in the medical care area; the most significant of these relate to the way health insurance permiums in the CPI are represented in the expenditure weights. While this change has no effect on the final index result and is mathematically equivalent to the former procedure, it is believed that the new structure provides a clearer picture of the role of health insurance in the CPI. Health insurance represents only expenditures by consumers for premiums -- employers contributions are, of course, not included. Insurance premiums can be viewed as purchasing (1) the medical car for which benefits are paid, and (2) the services of the insurance carrier in administering the policy. This second element has been labeled retained earnings and refers to the operating cost and the profit of the insurance carrier.