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Checking up on hospital price inflation

Rising medical costs are not a foregone conclusion

Many people are concerned with the persistent rise in medical costs. But as long as medical services are delivered (for the most part) by people, economic theory tells us that rising costs are normal: As technological progress makes the production of goods less expensive, the production of services becomes comparatively more expensive. Of course, technological progress can also occur with the delivery of services. A good example is the introduction of ATMs, which have dramatically reduced the cost of simple bank transactions.

The delivery of medical care has not (yet) seen such cost-saving technological advances; hence, its relative costs continue to generally increase, in line with basic economic theory. But the pace of that increase may differ under different circumstances. In international comparisons, health care delivery operates under vastly different market mechanisms. The graph above shows inflation for hospital stays in four countries: the United States, where health care is largely privately provided and paid for (except for the poorest and for retirees); the U.K. and France, where health care is provided and paid for by the state; and Switzerland, where people must enroll in private, but regulated, health insurance (not unlike Obamacare).

Surprisingly, the inflation experience is remarkably similar in the U.K. and the U.S., despite having health care institutions that are polar opposites. France shows much less inflation, and Switzerland even shows some deflation. Note that general inflation was similar in all these countries over this period, so dividing each hospital price index by the corresponding general price index yields a similar picture—shown in the graph below. But keep in mind that these are just four examples, and many other factors may matter. So, one shouldn’t generalize from such a small sample. But one also shouldn’t say that health prices always go up.

How these graphs were created: Search for “hospital CPI,” check the series you want, and click on “Add to Graph.” From the “Edit Graph” section, open the panel with the U.S. series and set the units to 100 for 2015-01-01 to match the other series. Finally, start the sample period on 2001-01-01. For the second graph, add to each line a second series (the CPI for the U.S., the harmonized consumer price index for all items for the other countries), apply formula a/b, and set the units to 100 for 2015-01-01.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: CP0000CHM086NEST, CP0000FRM086NEST, CP0000GBM086NEST, CP0630CHM086NEST, CP0630FRM086NEST, CP0630GBM086NEST, CPIAUCSL, CUSR0000SEMD

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