I came across this graph in an msn.com article on dentistry, and it makes me wonder why medical and dental prices stopped tracking general prices in the early 80s. It looks from the graph that all prices took off during the Nixon/Ford/Carter stagflationary period, but when that period ended for general prices, medical and dental prices stayed on the same trajectory. Anyone have any ideas why?
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Medical and dental are paid using other peoples money. The same could be said for tuition which is increasing much faster than inflation although in that case it could also be other times money.
Comprehensive coverage or what agmartin said.
I’ve long suspected that to be the reason medical costs grow much faster than general prices, but this graph invites the question of why medical costs grew in lockstep with general prices until the early 80s, then diverged.
Did medical and dental suddenly start getting paid for with other people’s money in the early 80s? To the contrary, Reagan’s tax cuts reduced the incentives to provide compensation as tax-exempt benefits rather than taxable cash wages. The best I’ve been able to come up with is perhaps a certain assumed growth rate in nominal prices was baked into the OPM payment mechanisms, and the OPM nature of the payments allowed those assumed growth rates to continue even when overall inflation was brought under control. But that explantion feels incomplete, at best.
technology and medical advances. The standard of care improved exponentially throughout the 90s, compared to the previous decades. A lot of medical technologies came to maturity in the 90s, including CT and MRI, as well as preliminary genetic techniques and computing power (which unlocked frontiers in pharmaceuticals).
heres a paper on pubmed – havent snagged te pdf yet but i can grab it later from work
http://www.ncbi.nlm.nih.gov/pubmed/2120654
Actually its pretty simple. Inflation is an exponential function. Medical and Dental expenses continue to fit an exponential curve. The difference is in the way OTHER expenses are now categorized and the way inflation is calculated. Nothing has changed except the BS way inflation is calculated. Ask yourself how inflation was virtually unaffected when gasoline shot from under $2 per gallon to over 4.
Two of those curves are natural. One has an unnatural break in it. Actual inflation is about 11% if it were calculated honestly. The same, or even more than the inflation rate for medical costs.
Yet another alleged problem that allegedly needs fixing, but the honest truth is that it doesn’t. Unless we are going to fix inflation as it regards every product and every segment of our economy.
The take I have on it is this: prior to the mid-80s, even though my family had health insurance, we had to pay up front and get reimbursed later. We felt that money come out of the checking account and knew that even though we’d get it back, we’d spend wisely.
Starting around the mid-80s, you just paid the co-pay and the dr would bill insurance directly. It’s a lot easier to go to the doc for sniffles when all you “pay” is 10 or 20 bucks for an office visit.
The unions pushed for dental to be included in the health plans for union shops in the 80s.
http://www.talkinghistory.org/spero/spero_transc_1970sand80s_2.pdf
Inflation was relatively unaffected when gasoline went from $2 to $4 because:
1. The inflation numbers usually reported (Core Inflation) specifically exclude food and energy because short-term changes in food and engery prices are almost always noise.
2. Gasoline is weighted lightly in CPI because gasoline is a very small chunk of most household budgets. Average one-way commute is 16 miles, which means a typical commuter uses 1-1.5 gallons/workday. Paying an extra $2/gallon at the pump adds up to about $500/year. Enough to hurt, yes, but a very small portion of your total annual spending.
Most of the serious critisms I’ve heard about the way inflation is calculated are based on objections to hedonic regression, the ludicrous notion that an iPod Touch is worth more than a Walkman and a BMW 760 is worth more than a Model T. Even if hedonic regression is a bullshit way of fudging inflation measures downwards, it’s not the answer to the problem at hand, since it wasn’t introduced into CPI calculations until the 90s.
The break in the curve for general price levels in the early 80s is the result of a radical shift in Federal Reserve policy where they printed less money in order to lower inflation. It’s entirely understanable that general price levels slowed their rate of growth. The odd thing is that the health sector didn’t follow suite.
Chad and Phelps, I suspect you’re onto something. I wasn’t aware of either of those, but they’re the sort of thing that would explain the curves diverging.
Hello Deans World,
It has been a while since my last coment…
There is no easy, simple answer. A statement of the obvious, I know. Many of the above, previous comments, mention some of the likely reasons.
#1 – My “Insurance” pays for it. Because people no longer pay out of pocket for healthcare costs, costs can rapidly rise. In fact, most people have NO idea the true cost of their healthcare.
#2 – Increase rate of use. People demand MORE healthcare today. Hip and knee replacements, cataract surgery, whatetever. When I was a kid only girls got braces, today EVERYONE has braces, even people in their 40s. A friend of mine just had hip replacement surgery, on his dog!
#3 – Prescription medications. Today, 50% of Americans take a prescription drug. Folks, that’s half the population. 17%, one in six, take 3 or more prescription drugs. I’m not talking the senior citizen crowd here, I’m taking everyone! In the 65+ age group, 85% are taking prescription medications. Some of these drugs cost $100,000 per year and more.
#4 – Cost shifting. Things like Medicare and Medicaid (government) costs being shifted to the private sector and taxpayer. If a procedure costs $1000 and Medicare pays the provider $500, guess who pays the difference? Unisured people, all the people that get their healthcare for free because a hospital can’t say no. Un-needed testing costs providers perform to satisfy legal requirements.
These are the main reasons, there are, of course, more. This will give you something to think about while you are waiting for your DOG to get it’s teeth cleaned…..
Rob (retired dentist)
I think it has to do with the different way in which pricing is done in healthcare compared with much of the rest of the economy. There’s no real market in healthcare. Pricing is done relative to Medicare reimbursement.
I’ve given a slightly expanded answer over at my place.
The problem with the answers above is they don’t explain why the divergence only began in the 1980s.
The two major economic events in that period were the IT revolution and globalization. They pushed prices for most things down, but medical/dental costs were largely unaffected, because they are cartelized service industries. Also, in both cases there are large questions about where cost effectiveness ends. How much is your life/mouth worth?
I would bet you can draw a similar line for legal costs.
In the 1980s/1990s, many people along the border with Mexico started heading south for dental treatment, because you could get fillings done for a couple bucks.
My answer, cited above, does explain what changed in the early 1980′s
No. The practice of law doesn’t limit entry as severely as the practice of medicine does.
Dave Price,
I believe my answer DOES address the reasons why medical costs have increased faster, since 1980.
Edit: One thing I did not mention above is the aging population. Off the top of my head (so I might be slightly off). In 1980 9% of the population was 65 or older, today the number is approaching 13%. This age group uses most of the healthcare, as I mention about medication.
My theory:
Adjusted for inflation, we are
1) Paying less per calorie of food
2) Essentially the day per BTU of energy
3) Some ridiculously small percentage of a penny per FLOP
4) Spending less per household on out of the house entertainment (movies, dinners, etc)
Also,
5) We now allow drug companies to market to the consumer rather then the customer (Doctors are the drug companies customers, since they are the ones that right the purchase orders / prescriptions)
#5 is probably greatly misunderstood. This is not a defect, but really, before a lot of the modern allergy, hair loss, sexual dis function, heartburn/acid reflux, and cholesterol drugs, psychotropic drugs (Ritalin, et al) were developed and marketed, the most common drug that was patient requested rather than doctor recommended was birth control pills. Now, we spend A LOT of money on quality of life medications.
Add in new tech in braces, teeth whitening, surgeries for recreational athletes, replacement joints etc., and medical / dental DEMAND has gone up, both at new choices are available and as disposable income has increased (due to #1-4).
Dave S.,
Cartelization existed before the early 1980s. In any case, the effect of medical/dental cartelization is somewhat overrated; half of all med school applicants are accepted somewhere.
I would bet dollars to doughnuts legal costs have grown like medical and dental costs. I can’t remember any “Dream Team” multimillionaire legal cases in the 1970s.
Autarky is a piece of globalization, so we agree there.
Robert,
I’m not seeing a major change in the 1980s there.
Also, consider the relative aging of the population.
It might be a complete coincidence, but that’s when “managed care” began to take off in the US. It was legalized in the mid 70’s, in the hopes that HMOs, PPOs, etc, would actually lead to a DECREASE in medical costs.
Funny how that didn’t happen. Of course the counter argument is, as always, “Well, just think how much costs would have increased if we hadn’t moved to managed care!”
I don’t think anything BIG, anything major specifically, changed in 1980 that caused what we are seeing.
History: Medicare signed into law July 1965. At the time, even with all the employer coverage of the 40s and 50s, people still paid 75% of healthcare costs. Medicare started undergoing all kinds of changes in the 1980s. During the 80s and 90s employer plans changed from fee for service to managed care (as jaymaster states). By 1995 the Government is now paying 50% of healthcare costs, with managed care plans paying much of the rest.
I’d say, yeah, an acceleration of the completely predictable outcome of the third-party-payer system, plus vastly enhanced technological capabilities. Thanks in part to the trial lawyers and in part to cultural factors, developing technology and the threat of liability for failure to utilize it made it more or less mandatory for doctors, at least in private practice, to max out on technological solutions — especially in diagnosis — utilizing techniques meant to solve the hardest problems. Also, the “average” medical technique is a lot less average as your population gets older and older and more and more medically complicated.
Or maybe Unilever really jacked up the price for Q-Tips.
This American Life (Chicag Public Radio), not what I’d consider conservative by any stretch has a very nice story set on the reasons health costs are increasing (10.16.2009, 392: Someone Else’s Money)
http://www.thisamericanlife.com/
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