Arnold Kling  

Health Care Prior to Stagnation

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An article by D. Eric Schansberg on the topic of "Envisioning a Free Market in Health Care" has an interesting table showing for various time periods the rate of "excess cost growth" in health care, meaning the differential between the average annual inflation rate in health care and the average inflation rate of all consumer prices. The numbers:

1935 - 1951: -1.1%
1952 - 1971: 2.6%
1972 - 1981: 0.7 %
1982 - 1992: 3.9%
1993 - 2008: 1.8 %

His point is that once upon a time, before health insurance became widespread, health care prices did not climb more rapidly than other prices. I am actually a bit surprised that the numbers are so striking. But it makes sense.

Keep in mind, though, that even if we had not expanded third-party payments, health care spending probably would have risen faster than other spending. That is, I think that the inflation-adjusted demand for health care has been on a long upward trend.

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COMMENTS (11 to date)
Trust FBO Me writes:

How does one measure inflation in health care? Do economists generally agree that the method produces a good number? Countless examples come to mind where it seems hard to tease out the cost of improvement from the cost of inflation.

Various writes:

As a former HC consultant, I would have told you that. I agree with you that, on average, HC expenditures should experience greater inflation than the economy-wide average, for the same reason that the price of latte's exceed the average. But...I can also tell you that the price controls and other top-down regulation of HC initiated by Medicare and copied by Medicaid and most insurers has retarded the basic productivity enhancements that occur in most other industries. Productivity enhancements do happen in the HC field, but not as much as they would if the consumer was paying for care directly.

It's difficult to put one's finger on any one example, because there are probably thousands of little inefficiencies in the HC services field that would be fixed under a direct consumer-to-provider payment system.

Various writes:

I should have been a little more specific in my comments. I think productivity enhancements in medical technology and drug development have been pretty good. These are driven more by market forces. For example, medical devices and drugs are physical things, and therefore much of the revenue comes from exports which by definition aren't subject to Medicare/Medicaid pricing. The problem area is the delivery of services. Basically what happens inside a hospital or clinic.

My guess is that if you were to separate the inflation into "devices/drugs" versus "services" you'd see most of the inflation coming from services. Unfortunately, it may be problematic to separate out those components.

steve writes:

Prior to 1952, medicine did not have much to offer to most patients. Antibiotics changed drastically in the late 40s. Non-flammable anesthetics came on board in the 50s. Big jumps in imaging and monitoring came in the 70s and 80s. Catheter techniques for the heart started in the late 60s early 70s.

"My guess is that if you were to separate the inflation into "devices/drugs" versus "services" you'd see most of the inflation coming from services."

LOL. Ever price a coronary catheter or stent? AICD? How about the screws and pins for modern orthopedics? Productivity enhancement? Sure, making an infinitesimally different total knee than you did the year before and charging more is productive. Ha.


Ted writes:

Uh, the price increases also directly coincide with the periods of medical innovation. 1950-1970 was a huge period of medical innovation, similarly 1980-1990 was also a huge period of medical innovations.

Just look at what was built during those periods and compare it too the other periods. You'll see the innovation was much larger in those periods.

Maybe health insurance proliferation was endogenous?

Jeremy H. writes:

BLS changed how they calculate medical care prices in the 1990s, both for PPI in 1992 ( and CPI in 1997 ( So the data is not directly comparable, and those calculation changes may explain part of the different trends in the historical series.

Jeremy H. writes:

More on the revisions:

Yancey Ward writes:

Inflation in prices should reflect an increase in an apple to apple comparison of services or devices over time. To use the example of a heart catherization that a commenter above used- what is the price to price comparison from, let's say, 1980 to today? If they aren't the same procedure, then an inflation number is meaningless. Just because a procedure is used far more often today than 30 years ago isn't an example of inflated costs, at least, not the way I view the term "inflation".

Yancey Ward writes:

To make the point more explicit- consider the statin drugs like Zocor and Lipitor, and others. There were no drugs in this class available prior to 1987, but today their sales are in the tens of billions of dollars/year. This is not an example of medical care inflation, in my opinion. Nor is the advent of organ transplants from 1970 to today, nor is it inflation if there are twice as many kidney transplants today as there were a decade prior.

John V writes:

too much aggregating and too little precision in the time periods measured.

The table tells us something but not nearly enough.

All health care is not equal. It'd be more interesting to see this little table of broad numbers get developed into something more precise that sheds light on different services and sectors within healthcare so we can draw better conclusions.

Shangwen writes:

I agree with some of the comments posted on methodological issues, but the most important issue is what Various noted in the third comment, that services would see higher growth rates than products. I would further suggest that most of the excess growth in HC is due to service costs. Despite the fact that everything in health care is hyper-regulated, there is more competition in the product market than the labor market.

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