has generally risen more rapidly than the overall CPI. Thus, underweighting the share of MCPI in the total CPI has resulted in an understatement of the aggregate CPI, other things being equal (see Berndt et al., 2000).

The argument for including both components of health care expenditures— those paid by employees and those paid by the employer—in the MCPI (and the CPI)—rests on the assumption that employees, if given the after-tax cash equivalent of employers’ contributions, would still spend most if not all of it on health insurance, paying a group rate for the insurance. Employers are generally indifferent as to how total labor compensation is split among wages and benefits, both of which are treated as (tax-deductible) expenses, although employers are obviously aware of the tax advantages for employees of employer-provided health benefits. Since the employer’s portion of health care insurance is a benefit provided to employees, and since employees can, to some extent, choose their employers on the basis of the full compensation package (wages, salaries, and health insurance benefits), it makes sense to incorporate the employer portion of health insurance in the CPI and MCPI weights, rather than treating it as a business expense unrelated to employee compensation or consumers’ expenditures (for further discussion, see Pauly, 1997; Summers, 1989; Gruber, 1994).

However, if employer health insurance payments were included in the MCPI and CPI, some current uses of the CPI (e.g., deflating earnings, measuring total compensation, escalating wages, escalating social security benefits) would need to be reexamined carefully. Even if employer health insurance payments were not incorporated into the MCPI and CPI, the usefulness and appropriateness of the CPI for measuring movements in the cost of living for subpopulations could be substantially affected by major policy changes, such as a prescription drug benefit for elderly Medicare beneficiaries. The problem of matching CPI design to particular uses is discussed in greater detail in Chapter 7.

Finally, because the CPI currently excludes from its domain government-provided goods and services, no weight is assigned for Medicaid or Medicare Part A services (hospitalizations and related physician services). An important consequence of this omission is that there is no overall price index for medical care—consisting of medical care expenditures from patients’ out-of-pocket payments, private insurers, and government insurers (Medicare and Medicaid). To inform public policy discussion and to evaluate the performance of the U.S. medical care sector, a comprehensive MCPI is needed that encompasses purchases from all payers—governments, private third-party insurers, and consumers.

DIRECT PRICING OF HEALTH INSURANCE

As outlined above, BLS currently reallocates consumers’ payments for private health insurance and Medicare Part B expenditures back to the five MCPI components. In this indirect pricing of health insurance, the BLS encounters



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