For many years price increases in the medical sector has outpaced overall inflation by a significant amount. According to the Bureau of Labor Statistics, here is the increase in consumer prices over the last few years.
Medical inflation is outpacing general inflation by an average of 1.5% per year. But is this measure of medical inflation accurately measured? Not according to paper by Joseph Newhouse (1992). Here are 4 reasons why not.
- Medical CPI measures input, not final goods. The CPI for medical services focuses on inputs such as physician visits or hospital days. However, the service the patient consumers is treatment for a specific disease. An increase or decrease in the requisite number of doctors visits is a change in the input towards treatment. A true measure of medical CPI would measure how the price to treat a disease changes over time.
- Actual Prices not observed. Generally, statisticians use the list price as the price of medical services. However, very few people pay this list price. Most individuals have insurance and these insurance companies negotiate bulk discounts. Thus, the list price is not the relevant price for most individuals.
- Quality changes. Even if one uses the same amount of inputs in treating a disease, the quality of medical care has likely increased over time. Of course, observing quality changes in medical care is extremely difficult.
- Medical CPI weight out-of-pocket expenses. Medical CPI weighs the cost to consumers of medical spending. However, since most people have health insurance, items which are paid more frequently out of pocket receive a higher weight. For instance, dental care is more frequently paid out of pocket and thus receives a higher weight in the CPI. [I am not sure if this weighting has changed in more recent versions of the medical CPI].
- Joseph P. Newhouse (1992) “Medical Care Costs: How Much Welfare Loss?” The Journal of Economic Perspectives, Vol. 6, No. 3 (Summer, 1992), pp. 3-21