CONSTRUCTING A HEALTH INFLATION INDEX: AN ACTUARIAL FRAMEWORK FOR MEASURING MEDICAL COST GROWTH IN INDIA

Abstract

Health inflation has emerged as one of the most significant challenges facing India's health insurance industry. While general inflation measures such as the Consumer Price Index (CPI) provide broad indicators of price movements, they often fail to capture the true escalation of healthcare costs experienced by insurers, hospitals and policyholders. This study develops an Insurer's Health Inflation Index to measure healthcare cost inflation across multiple dimensions of the Indian health insurance ecosystem. Using anonymized health insurance claims data sourced from the Insurance Information Bureau of India (IIB), the study analyses inflation trends from three stakeholder perspectives: the insured (claimed amount), hospitals (billed amount) and insurers (paid amount). The analysis examines healthcare inflation across gender, claim type, payment type, relationship category, policy type, age band, state and disease-cost classifications. Average Claim Size (ACS) is employed as the primary measure of claim severity, while Compound Annual Growth Rate (CAGR) is used to estimate long-term inflation trends. The study further incorporates a synthetic forecasted dataset extension of the original dataset to provide a broader eleven-year analytical horizon from 2015 to 2025. The findings reveal that healthcare inflation is highly heterogeneous across categories. Higher inflation is observed among females, surgical procedures, cashless claims, individual policyholders, older age groups and certain geographic regions such as Delhi and Tripura. Very high-cost medical conditions exhibit the greatest expenditure growth, highlighting the increasing financial burden associated with complex treatments and advanced medical technologies. The results also suggest that technological advancement and deteriorating population health jointly contribute to rising healthcare costs, although their effects vary across demographic and policy segments. The study demonstrates that claim-based measures provide a more accurate representation of medical inflation than traditional macroeconomic inflation indicators. The proposed Health Inflation Index offers valuable insights for insurers, actuaries, policymakers and healthcare providers in pricing, reserving, product design and healthcare cost management. The findings contribute to the growing literature on healthcare expenditure by providing a multidimensional framework for measuring and understanding medical inflation in India.