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Rising Health Care Prices

We are told by politicians that the way to reduce health care costs is by getting more people covered with health care insurance and getting more preventative care. Maybe. Maybe not.  When we look at the numbers, we have to conclude that the problem is that demand is shifting up faster than supply.  The only thing that will bring health care prices down is if we are able to get supply to increase faster than demand.

Recently, the White House hosted a Health Care Summit. C-SPAN had some good coverage on it that you see at their website. The links to the events are:

Summit Opening Remarks, Breakout Session, Obama and Kennedy: Closing Remarks on Healthcare Summit, BilyTauzin Interview on Pharmaceuticals.

Most of the discussion centered on health care coverage–insurance. I would suggest that the problem that most Americans face is not whether or not they are covered, but the high cost of coverage.  Premiums are very expensive. A lot of the productivity gains of the American worker in the last 20 years has been paid to the employee, not in wages, but in the employer’s share of health care premiums.

I plotted some health care data and came up with an interesting picture. I based this picture on two date sources: 1) National Health Expenditures 1960-2007 from the Centers for Medicare and Medicaid Services (http://www.cms.hhs.gov/nationalhealthexpenddata/ downloaded 3/10/2009) which provides estimates of the total expenditures in the US on health care and 2) the Consumer Price Index (CPI) subindex on health care (just like there is one on energy and another on food) which comes from the Bureau of Labor Statistics. I got a relative price of healthcare by dividing the Health Care CPI by the complete CPI (all goods and services). This tells us which is going up faster, general prices or health care prics and if HC is becoming more scarce (more in demand relative to what is going on with supply).


I divided the expenditure data by the Health Care CPI to get a quantity measure and then divided through by the population, to look at the quantity in per capita terms (more people means more buyers, but more suppliers too). Price and quantity combinations observed in the diagram below do not show a supply curve or a demand curve, but rather show where supply and demand intersect–the “equilibrium” values.

On the diagram above, the price is the Medical Care component of the Consumer Price Index (CPI) divided by the general (all goods and services) CPI, and multiplied by 100. 1983 is used as the base year (1983=100 for both all prices). The Quantity axis measures Health Care Expenditures per capita (Expenditures divided by the population) for that year and then divided by the Medical Care CPI, which gives us a measure of quantity for that year. Then, this quantity figure is “standardized” by 1983’s quantity (all years quantities divided by 1983’s quantity. The above should not be thought of as a demand or a supply curve, but showing the path of equilibrium prices and quantities for the years from 1960 (point furthest to the left) to 2007 (point furthest to the right). Think about how supply and demand must be shifting to give such numbers.

By the way, the 1960 point is at the lower left and the 2007 point is at the upper right. For things to look like this though, the demand must be growing or shifting out to the right faster than supply is increasing. And why has this occurred? Expanding health insurance coverage. The more someone else is paying our bills, the more we spend and the less attention we pay to our costs. Ever notice all those scooter store ads on TV, ads you never saw before Medicare started paying for scooter chairs? And all the ads say buy this and let Medicare pay for it (“If we approve it and Medicare turns you down, you get to keep the chair”), not a cent out of your pocket.

So, health care is way too expensive, because we have pushed up demand with all of our health insurance–and the politicians’ answer is more of the same, more HC insurance, more 3rd party payment, less individual responsibility. The folks at the Health Care Summit routinely avoid talking about doing anything on the supply side of the market–getting more doctors, more nurses more hospitals, more pharmaceuticals for the same prices (shifting supply out). Here are the questions we should be asking: How do we get the FDA to speed up its approval process? How do we get the med schools and nursing schools to open up their doors a bit wider? These are the things we need to get affordable health care, as universal health care increases demand without doing anything about supply.


3 Responses to “Rising Health Care Prices”

  1. Jason Trosclair says:

    I say down with big government and big government spending.How in the world will the government run health care when they clearly failed at almost every business venture on their list. I am not in favor of empowering them to add another bankrupted business venture to their already extra long list of governement corrupted scams at the tax payers expense. Who in the world would let someone run so many projects into the ground with no penalty of their actions. Come who’s the boss here Us or Them? It’s the government spending that”s broken not the healthcare system everyone can live the America dream if they choice.

  2. Antoinette Link says:

    In my opinion I feel that health care is not being given the attentions that it needs. I think by the government helping to pay for health care it would give families with low income the ability to attend to many of their health care issues.Many people are losing their jobs and also their benfits one which is their health care coverage.I feel the government should help its citizens. If the country is weak do to bad health,we could appear a target for our enemies.

  3. Felicia Zenthoefer says:

    In my humble opinion I feel that health care in this country should be solely independent. When a government starts subsidizing peoples health care that country officially become a socialist country. America was founded by independent people with ideas that went against the grain. All I’m saying is that when a government steps in to “bail out” someone it only encourages the individual to not pay their lone or debt. So when a government thinks they are helping by paying for the health care, in all honesty they are hindering. If they are going to “bail out” the country once they will have to do it again.

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