Is Health Inflation Really Quite Tame?

increaseI sometimes feel the odd man out when addressing inflation in U.S. health care. I discuss the monthly Consumer Price Index and Producer Price Index releases, as well as other monthly and quarterly economic releases that include health spending. I have suggested health inflation is stirring, which is counter to respected scholars like Chris Conover of Duke University and those at the Altarum Institute, the “go to” source for analysis of health inflation.

However, I seem to be siding with ordinary Americans, who are struggling as much as they ever did to pay medical bills. I expect people still struggle because, although inflation in health goods and services is low by historical standards, it is high relative to general inflation faced by consumers.

Looking at the Altarum Institute’s latest Price Brief, it reports 12-month CPI ending in four different periods: November 2013, November 2014, October 2015, and November 2015. The average of all four measurements is 0.8 percent. The average of the medical CPI is 2.65 percent.

Yes, that is low by historical standards. However, it is still 1.85 percentage points higher than CPI. If we look back over the very long term, CPI averages about three percent and medical CPI about five percent. That is, medical prices faced by consumers increase about two percent faster than overall CPI. So, the new normal is not much of an improvement.

Looked at another way, 1.85 percent is almost two and a half times more than 0.8 percent. So, if a consumer experiences health inflation relative to general inflation, he will think it’s even worse than he used to (because two percent is less than one half more than five percent).

[Professor Conover’s article explains why some scholars dismiss CPI and medical CPI as appropriate measures of inflation for health care, preferring another dataset, Personal Consumption Expenditures (PCE). There are very good reasons for such a conclusion. However, CPI comes out monthly. The PCE price index is updated only quarterly, and that is only for services. Prices for goods, such as drugs and medical devices, are updated only annually. Plus, consumers only really care about price increases they experience directly, not price increases borne by other economic actors.]

Comments (12)

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  1. John Fembup says:

    I think you are correct, and I would suggest another reason that adds to the burden,

    However fast medical expenses may be rising, people can still experience faster-rising out-of-pocket cost. That’s because increasing deductibles and other cost-sharing is now built in to Obamacare by law.

    Costs are being shifted to insured people under Obamacare faster than their underlying medical coats are rising,

    • Thank you. However, let’s not forget that moving cost from premium to out-of-pocket is not actually shifting costs, despite the vernacular use of that term.

      • John Fembup says:

        For individual insurance, where the insured pays 100% of the premium, that’s true.

        In group insurance, when a plan sponsor subsidizes the premium it’s not necessarily true.

        Just as with individual insurance, the group insurance benefit is diminished by higher deductibles or co-pays, and the insurance premium diminishes accordingly. If the plan sponsor shares in the reduced premium, the insured persons do not realize 100% of the premium reduction, but do absorb 100% of the value of the higher deductibles & co-pays. That would be a cost-shift, no?

        • The plan sponsor does not subsidize premium any more than he subsidizes wages. It is compensation implicitly subtracted from wages. The only reason employees get health insurance as a group benefit is the tax treatment. They still pay 100 percent of the premium, no matter how much appears to be paid by the sponsor.

          • John Fembup says:

            John are you saying that when the employee pays an extra $100 because of an increased deductible, that the employer increases the employee’s wages by the full amount of the actuarial value of that $100 spread over all the covered employees?

            • Not at all. I am saying that whether it is deductible or premium, the employee pays 100 percent of the costs. If we had a properly consumer-driven market, insurers would not fix fees with doctors. We don’t have that yet, so spending under the deductible is not truly consumer-driven. Nevertheless, it is significantly more efficient than spending via premium, which adds administrative load and other costs to health spending.

              The reason wages have been flat for decades (roughly speaking) is that even though American workers have become more productive, their increased compensation has been offered as health benefits, not wage increases.

              If we got rid of the exclusion of employer-based benefits from taxable income, and had a standard deduction or tax credit instead, what would employers do with the money they currently spend on health benefits.

              When I ask this question speaking publicly, the answer is almost always “my boss is a greedy S.O.B, he will take the money as C-suite salaries or return it to shareholders and I will be stick with paying for the health insurance.”

              That is NOT what would happen, even if the boss wanted it to. We have a competitive labor market. The money currently spent on benefits would be added to workers’ wages.

              Conversely, the amount currently spent by employers on benefits is effectively subtracted from workers’ wages, although they don’t see it.

              • John Fembup says:

                OK, I understand and I agree the employee pays 100% of the cost, whatever it is. Thanks for the explanation.

                I understand wages and benefits are both compensation. Yet I’ve never known an employer that raised wages coincident with reducing benefits. I’ve also never known an employer that tried to persuade employees that they will get higher wages sometime in the future in return for diminished benefits now.

                The allocation between wages and benefits is not transparent to employees. So while the economic argument is logical, maybe it’s not completely “psycho-logical” because it sounds too much like “I will gladly pay you Tuesday for a hamburger today”. 😎

  2. Devon Herrick says:

    The research I’ve seen suggests the recession slowed spending as people tightened their belts. Also, the average deductibles for coverage have about doubled over the past 10 years. More employer plans are using cost-sharing as a deterrent to wasteful spending.

    It appears that increasingly health expenditures are rising due to very high cost patients (because many of the other patients are increasingly cost-conscious). Consider this: 1% of prescription drugs are so-called specialty drugs, and account for one-third of all drug spending. By contrast, generic drugs represent 88% of all prescriptions, yet only account for 28% of drug spending. I’m sure it’s not this simple, but we can assume the cost-conscious patients taking generic drugs while the high-cost patients are on the specialty drugs.

    • Barry Carol says:

      Medicare spending has also slowed significantly since 2009 as compared to the prior 5-10 years. Yet, hospital deductibles and Part B deductibles have not increased much and the recession should not have had as much impact on utilization for the Medicare population as it may have had for working people whose monthly cash flow is more job dependent.

      • That is a very good point. Nonetheless, most economists think there is some positive relationship between Medicare spending and the economy, if only because some Medicare beneficiaries work and lose their jobs in recession.