August 03, 2007 (The Editor’s Desk is updated each business day.)

Medical care inflation in 2006

The medical care price index increased 3.6 percent last year, the smallest increase since 1998. The index had risen 4.3 percent in 2005.

[Chart data—TXT]

Lower inflation for prescription drugs and medical supplies and for professional medical services was partially offset by higher inflation for hospital and related services.

Medical care commodities prices rose 1.8 percent last year, the smallest increase in this index since 1995. In 2005, prices for medical care commodities rose 3.7 percent. Prices for prescription drugs and medical supplies rose much less in 2006 (1.9 percent) than during the previous year (4.4 percent). Indeed, the 2006 increase was the smallest calendar-year rise in that index since 1973.

In January 2006, Medicare introduced a prescription drug benefit "Part D," which contributed to a slower rate of price growth in the index for prescription drugs. The prices that Medicare Part D beneficiaries pay for these drugs are typically less than those paid by other health insurance providers and by the uninsured.

Another factor behind the lower rise in the index for prescription drugs occurred during the fourth quarter of 2006, when many pharmacies offered certain generic medications at dramatically reduced prices. Also, a number of popular, name-brand drugs, including medications for high cholesterol, depression, and blood thinning, lost their patent protection during the summer of 2006. The ensuing substitution by consumers from higher priced name-brand medications to the new lower priced generic equivalents was felt acutely in the last quarter of 2006, when the CPI reflected such substitutions.

The medical care services index rose 4.1 percent in 2006, down from a 4.5-percent increase the previous year, reflecting a deceleration in the indexes for physicians’ services, dental services, and eyeglasses and eye care. Following a 3.1-percent rise in 2005, fees for physicians’ services increased 1.7 percent last year, the smallest annual advance in this index since 1949.

These data are from the BLS Consumer Price Index program. Annual percent changes are December-to-December changes. Details on the calculation of the medical care CPI are in Measuring Price Change for Medical Care in the CPI. For additional information on consumer price changes in 2006, see "Consumer prices rose less in 2006 than in 2005," by Todd Wilson, Monthly Labor Review Online, May 2007.