Is Price Inflation Different for the Elderly?

July 31, 2006 in Pharmaceuticals, Social Security | Permalink

One Social Security reform often suggested is to change the indexation of benefits from a wage inflation measure to a price inflation measure, such as the Consumer Price Index (CPI).  Critics argue that the price of healthcare has increased more than overall CPI and since the elderly spend a higher percentage of their income on healthcare, the CPI may not accurately reflect their annual cost of living increase.  This is certainly true.  According to the Bureau of Labor Statistics website, during the last 20 years overall prices have increased 85.3%, but medical care prices have increased 176.3% and medical care service prices have increased 188.6%.

This phenomenon was the inspiration for a Berndt, Cockburn, Cocks, Epstein and Griliches (1998) study on pharmaceutical price inflation for the elderly.  The authors wanted to test whether or not price inflation for pharmaceuticals is different for the elderly as compared to the non-elderly. 

The authors constructed an elderly and non-elderly aggregate pharmaceutical price index and find that elderly drug prices increased 33.1% over 6 years (1990-1996) while non-elderly drug prices increased 32.9% in the same period, an insignificant difference.  The authors also look at 3 types of medications in more detail: antibiotics, antidepressants and calcium channel blockers.  They find that when the elderly proportionally use more generics (as in the case of anti-depressants) the elderly price inflation is lower than that of the non-elderly; when the elderly use more branded medicines (as in the case of antibiotics), then elderly price inflation is higher than that of the non-elderly.  Their paper suggests no persistently higher rate of price increase for the pharmaceutical products used by the elderly as opposed to the non-elderly; the only differences in price inflation are due to the frequency of generic drug usage.

  1. BC’s avatar

    BC on July 31, 2006 at 1:34 pm

    For the elderly as a group, out-of-pocket healthcare costs consume a higher percentage of their budget than for other segments of the population. To the extent that healthcare costs are increasing in price considerably faster than the CPI overall, the inflation rate for the elderly should be higher.

    On the other hand, most of the elderly enjoy considerable cost advantages vs the young. To with, most are debt-free homeowners. Their children are grown and on their own, and they no longer have job related expenses (if retired). Thus, especially for the large group of them that is either reasonably healthy and/or have good insurance to supplement Medicare, they can support a middle class lifestyle on a far lower income than a young family with a large mortgage, children to feed and educate, and job related expenses (such as commutation).

    The bottom line is that the elderly as a group are probably financially better off than the mainstream press would have us believe.

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