Medical cost inflation: Highest level in 8+ years

Is this a blip or a bombshell?

An eyebrow-raising jump in the prices of medical care that helped boost the Consumer Price Index surprised economists and health-care experts, who can't figure out what's driving the large increase. It's also not clear whether the pace will be maintained beyond just one month.

"I find this maddening," said Douglas Holtz-Eakin, an economist and former director of the Congressional Budget Office who's now president of the American Action Forum policy institute.

"I'm now obsessed," he said.

Holtz-Eakin told CNBC he downloaded a decade's worth of data, and spoke to a half-dozen economists and health-care analysts, to try to figure out what drove medical care prices surprisingly higher in April. The increase was largely driven by reported hikes in the prices of hospital services.

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Those experts said there was no regulatory change or any other obvious event during April that could have sparked the sharp price spike.

"We have no explanation for what's going on in hospital services," Holtz-Eakin said. "Why it's so big, and why in April, I can't explain it."

The so-called medical care index, maintained by the Bureau of Labor Statistics, rose 0.7 percent in April, "its largest increase since January 2007," the BLS wrote in a report issued Friday. The overall Consumer Price Index, of which medical care is one of eight components, grew just 0.1 percent for the month.

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The BLS report also revealed that the broad subset of medical care services grew by 0.9 percent. Medical care services, which is the largest component of the medical care index, includes the prices of professional services, hospital and related services and health insurance. Hospital services rose 1.9 percent for the month, the BLS said.

That number really caught Holtz-Eakin's eye. He said "blips," "anomalies" or other oddities in economic data happen at times, only to vanish when new numbers come out a month later. But a 1.9 percent monthly blip—which, if maintained, would equal a nearly 24 percent annual rate of hospital services inflation—is "pretty big."

"I don't remember seeing one [blip] this big," he said. "I've been concerned about hospital pricing for a while."

When asked about what may have driven the increases, particularly in the prices of hospital services, BLS economist Steve Reed said, "We don't have a particular reason for it."

"It is sort of a question of, does this reflect genuine price changes, or some quirk in our index, and I can't answer that confidently," he said.

He added "that [hospitals] index has been unusually volatile lately." That includes an 0.2 percent drop in February which, while not a large percentage change, was unusual because it showed a decrease. He also said the index is based on a relatively small sample, and that BLS has had problems getting responses to price queries from providers for its survey.

"This isn't an index that I'd have a huge amount of confidence in, at least month-to-month. Long-term I would," Reed said. "It's one of the most complicated and problematic indexes."

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Holtz-Eakin noted that hospital-related spending has been a significant factor in the growth of health-care spending, and that more hospitals are absorbing physician group practices, which can lead to price hikes in affected areas because of a decrease in competition for services. In these cases, hospitals can charge so-called facility fees that doctors cannot impose.

He also pointed out that emergency room usage has not gone down with the rollout of President Obama's health-care reform law, which has reduced the amount of money hospitals receive for caring for patients who cannot afford to pay their medical bills.

But Holtz-Eakin also said that although he was worried about the price impact of those trends, he would not expect their full effect to show up in one single month—or to such a large degree as was seen in the new CPI report. Instead, he said, the inflation would have been seen over the course of a number of months, with a much more gradual rate of increase.

"I can't figure out what's going on," he said.

The BLS report comes three days after the large actuarial and consulting firm Milliman projected 6.3 percent growth in the costs of health care for a typical family of four on an employer-based plan in 2015. That compares to a low-water mark growth rate of 5.4 percent last year.

Milliman's report is the latest indication that health-care costs, which saw a historic slowdown in their rate of inflation in the years after the Great Recession of 2008, are headed back up toward the trends seen before the financial meltdown. Before the recession, double-digit inflation in health-care costs was common.

"There's a correlation between the CPI medical index and the MMI, but they're very different measures," said Chris Girod, a principal and consulting actuary at Milliman, who added that the MMI looks at a broader range of prices. "The annual increases [in the MMI] tend to be a lot higher than CPI."

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Milliman's report blamed resurgent inflation on price increases for prescription drugs, particularly specialty drugs. "The rest of the category, the increases were pretty ho-hum this year," he said. Prescription drug prices overall are expected to increase by 13.6 percent in 2015, according to Milliman's index.

In the category of specialty drug prices alone, "the annual increases are around 20 percent right now," Girod said. Those specialty drugs include Sovaldi, made by Gilead, which in a 12-week course of treatment can cost $84,000.

"The drug trends have actually been coming down in the last four or five years until now," Girod said.