Medical Care Costs

(I apologize for the formatting this time. This one looks pretty bad. This blogspot is not user friendly when it comes to formatting and formatting is not my thing.)
On July 18 and 25 I wrote blogs that  focused on government spending on healthcare. I got some questions and decided to look a little further into medical costs. 

Below are words I lifted from the Bureau of Labor Statistics which define the two medical price components found in the US Consumer Price Index. Medical Care relates mostly to Commodities like pharmaceuticals and medical devices. The larger of the two components measures the prices of Medical Care Services from regular doctor's office visits to hospital services to buying a pair of glasses.

Medical care in the CPI is broken down into medical care commodities (mostly prescription and non-prescription drugs) and medical care services.

Medical care services is the larger of the two components, representing over three-fourths of the medical care weight and about 6 percent of the entire CPI market basket.

Exactly what does the CPI price in medical care services? The largest components are hospital services and physicians’ services. Also included are dental services, services by other medical professionals, eyeglasses and eye care, and nursing homes.

In other words, the medical care services index in the CPI reflects the cost to consumers not only of trips to the doctor’s office or to the hospital, but also of trips to the dentist, psychologist or chiropractor, or even buying a new pair of glasses or staying in a nursing home.

The goal today is to compare the long-term behavior of these two medical price series to the performance of the overall Consumer Price Index which includes everything purchased by typical US urban consumers. 

The first table below presents the inflation rates for five decades beginning in 1966 and ending in 2016.  You can see, for example, that the CPI rose 8% per year from 1966 to 1976. In the next decade it rose by 9% per year. Since then inflation has been falling to where it grew by a mere 2% per year from 2006 to 2016. In each of those decades the price of medical care rose faster than the CPI. For example, in the decade from 1976 to 1986 Medical Care Commodities was increasing by 13% per year while the CPI rose by 9% per year. Medical Care Services rose even faster than Medical Care Commodities in three of the five decades. It rose, for example, by 14% per year from 1976 to 1986. 

The second table lets you see more directly how Medical Care Commodities and Medical Care Services were changing relative to the overall CPI. For example, from 1966 to 1976 Medical Care Services rose by 12% per year relative to the CPI at 8% per year. That implies that Medical Care Services were rising 50% faster than the CPI. Did that relative performance change? As you read down the last column of the second table you see the numbers 50, 56, 125, 67, and 100. The general trend has been upward for 50 years. Medical Care Services from 2006 to 2016 rose twice as fast as all goods and services. 

For the last 50 years Medical Care Commodities and Medical Care Services have grown much faster than overall prices of consumer goods and services. There is reason to believe from these numbers that the gap has increased over time and while the gap has been larger (1986 to 1996) it was very high from 2006 to 2016. 

The obvious next question is to ask is why. But answering that is no easy task. The provision of healthcare has changed much since 1966 and again since 2006. Medicaid and Medicare made for major changes and more recently Obamacare added new layers of delivery and payment. Today we nail down one point -- the medical sector has been and continues to be highly inflationary when we compare it to the other things we buy. 

The CPI attempts to make adjustments so that we compare apples with apples over time. Therefore, a rise in price should not indicate an increase in quality -- it should be a rise in price for a like or similar good or service. But we know that technology in medicine has been very important and while the Bureau of Labor Statistics may try to adjust for quality, I am guessing these adjustments are not perfect. Healthcare is both better and more expensive. I fear much of what the numbers show is that we are paying more to stay healthy and alive. 

One upshot of today's data. If government is spending more for healthcare today it is not just because of Obamacare. Healthcare prices have overshot just about everything for half a century. If we want to control how much we pay either through or without government, we need to better understand pricing of healthcare goods and services. 

Annual Inflation Rate Per Decade

1966 to 2016, in Percent

CPI All items, Medical Care Commodities, 
and Medical Care Services

			Medical
		Medical	Care
	All	Comm	Services
66 to 76	8	10	12
76 to 86	9	13	14
86 to 96	4	8	9
96 to 06	3	5	5
06 to 16	2	4	4

Relative Annual Inflation Rate Per Decade

1966 to 2016, in Percent

CPI All items, Medical Care Commodities, 
and Medical Care Services

			Medical
		Medical	Care
	All	Comm	Services
66 to 76		25	50
76 to 86		44	56
86 to 96		100	125
96 to 06		67	67
06 to 16		100	100