Thursday, July 16, 2009

The strange case of US medical costs

If Mr. Obama's is going to succeed in reforming US healthcare, he is going to have to do something about medical inflation. Since 1970, health care costs have increased almost 12 fold. During the same period, the US CPI increased 5 times.

Healthcare inflation also tells us something about the true nature of US inflation. Medical care is essentially a non traded good. As you can see from the chart, healthcare costs departed from the CPI around 1990, just as China began to industrialize and flood the US with cheap consumer goods. Therefore, the headline CPI was hiding very rapid inflation in sectors such as health.

Healthcare is now unaffordable for millions of Americans. The reason is a simple one. US suffered from a concealed and barely understood inflationary surge, which the Fed accommodated with low interest rates.

5 comments:

  1. Wow, that chart is an eye-opener.

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  2. "US suffered from a concealed and barely understood inflationary surge, which the Fed accommodated with low interest rates."

    Uh, you got the causality reversed there.

    And you're wrong anyway. The surge health care costs is due to a number of factors - rent-seeking by doctors (they control the number of medical school slots), lobbying by Big Pharma (the government was barred from negotiating drug prices for Medicare Part D), a huge overhead of accounts-receivable staff in medical offices who fight insurance companies for payments, providers that are geared towards billing for services instead of keeping people healthy, and more. It's a huge complicated mess that has resisted the obvious solution - a single-PAYER system - due to America's method of financing political campaigns.

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  3. Anonymous,

    You are not wrong. Everything you say is true. However, none of this could happen without the facilitating monetary expansion generously provided by the Fed.

    Suppose for a moment that the Fed hiked rates back in 1997. The dot.com bubble wouldn't have happened, US household debt levels wouldn't have increased, and people would have had to pay their bills out of current income. In such circumstances, doctors would have had to curtail their price increases.

    However, there is a more fundamental why doctors don't cause inflation. The AMA act as a monopoly. Monopolists restrict supply, and create a deadweight loss. Monopolists by themeselves can not create an inflationary spiral. (If you don't believe me, check out Blanchard and Kiyotaki's model of monpolistic competition.)

    The casuality for inflation always goes from money to the real sector and then into prices.

    Alice

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  4. I'm sorry, but everything the anonymous poster said is NOT true.

    "providers that are geared towards billing for services instead of keeping people healthy, and more. It's a huge complicated mess that has resisted the obvious solution - a single-PAYER system"

    There is no reason to believe that a single-payer system will stop providers from being billing-centric. Unnecessary tests are ordered for the purposes of billing and covering the hospital's ass in malpractice cases. Health care costs exploded when malpractice damage awards exploded. I know, I have family working in a hospital - one works in legal, another in billing, and the other works in a lab. The lab gets triplicate test requests (and doesn't have enough staff to do them) and the hospital has so many lawsuits that they routinely pay the plaintiffs without a fight if the claim is under 3K because it's cheaper to pay it than to pay legal staff to fight it. Those lawsuits will not stop with a single-payer system. Another family member works directly with doctors at Harvard Med - most staff doctors are unaware of how the business operates (and they don't want to know), they are simply told to follow the carpenter's advice - measure 3 times, cut once - so unnecessary tests are ordered.

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  5. Alice, I suggest you compare the health care inflation world wide and over the last 40-50 years.

    America's great health care inflation was actually until the 70's and has been median with the rest of the world since (it is just we are growing on an already large number).

    For comparison, the UK has had much greater health care inflation over the last 20 years.

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