I’ve heard it mentioned several times on NPR and other news outlets that growth in healthcare spending has slowed since the Patient Protection and Affordable Care Act (commonly called “Obamacare”; hereafter referred to as the ACA). By cherry picking this number of that measurement, this is a believable claim, and it is true that inflation for health services is at an all-time low (Figure 1). But I want to focus on this measurement in context of inflation as a whole.
Since the end of World War II, the price inflation of medical services and durable medical equipment has been fairly consistently one and a half to two times the overall inflation rate (figure 2). Wage increases, when they happen, tend to follow cost-of-living adjustments or otherwise be tied to the core inflation rate. So when the prices of medical services rise faster than the overall price level, they consume a higher proportion of consumers’ income. This description is a simplification, to be sure, and it doesn’t always describe day-to-day, year-to-year negotiations, but it does describe the fundamentals of long-term wages and spending and year-to-year trends within the macroeconomy.
In Figure 1, we can see some salient historical features:
- For (almost) this whole time period, medical prices have been rising faster than prices in the rest of the economy.
- Bad Macroeconomic policies of the 1970s involving abusing the Phillips Curve and wage and price controls resulted in uncharacteristically high inflation during that time period
- We can see an anomaly in the early 1980s with the Volcker Recession where Medical inflation was lower than core inflation, and inflation as a whole fell off a cliff in the early 1980s, and continued to fall steadily while Greenspan was Fed Chair through the 1990s and early 2000s.
More into the weeds, the Bureau of Labor Statistics is responsible for tracking the price level, using a pre-defined bundle of goods and services, including medical services. The Consumer Price Index is a standardized price level, where 100 is fixed in a base year; inflation is the percent increase in the price level from one period to the next. There are problems with the CPI, but it’s still a widely-used tool. My analysis compares the ratio of Core CPI–which excludes the two most volatile sectors, food and energy, from the overall inflation measure–to inflation of medical goods and services. This ratio shows how much faster is inflation in the medical sector devaluing our incomes relative to the rest of the economy. I pulled data from the Bureau of Labor Statistics using their R API. Year-over-year inflation was calculated by the percent increase in price level from December to December. Source code for analysis can be found at www.github.com/dannhek/inflation.
Figure 2 shows pretty clearly that the ratio between medical inflation and core inflation is still within normal bounds (within 1.5 standard deviations). The ACA has not really changed the root of the problem at all. This isn’t an indictment of the ACA as a whole, since the ACA wasn’t targeted at fixing the fundamentals. But it does show pretty clearly that the ACA does not change the incentives to raise prices with little to no market counterforce, so prices in healthcare are still rising faster than prices in the rest of the economy, ACA notwithstanding.
 The fact that it wasn’t targeted at fixing the fundamentals is something of an indictment, but that’s another blog post.