Adjusting for Changes in Medical Care Prices Over Time

Average Annual Worker and Employer Contributions to Premiums and Total Premiums for Family Coverage,

1999-2011

* Estimate is statistically different from estimate for the previous year shown (p<.05).

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2011.

$5,791

$6,438*$7,061*

$8,003*

$9,068*

$9,950*

$10,880*

$11,480*

$12,106*$12,680*

$13,375*$13,770*

$15,073*

What are health care costs?

• When we speak of “health care costs,” we really mean total health expenditures

• Equation for medical expenditures E:

E = P · Q • E is expenditures on medical care• P is the price of medical care • Q is the quantity of medical care

E = P x Q

• Hypotheses to explain rising expenditures:– Prices have increased– Quantity demanded has increased– Technological innovations and technological

overuse

Quantity may be increasing

• An aging population– people demand more health care as they age

• A richer population– rising incomes lead to more health care

consumption • More insurance coverage

– More insurance reduces out-of-pocket prices to patients of obtaining medical care

• Increasing quality of medical care– Technology improves quality of life but is a large

contributor to increasing costs in health care

Are rising costs a bad thing?

• If rising costs are due to rising demand– rising health care costs is not necessarily a bad

thing– People are not necessarily worse off

• If rising costs are due to rising prices– Rising costs does harm consumers

– Health is getting more expensive to produce, so people will either have to cut back on health care or spend more money to stay healthy

Prices may be rising, because…

• Increased resource costs

• Less competitive markets – Hospital mergers may have made the market

more monopolistic

• Expensive new technology – if modern medical care routinely incorporates

new, expensive technologies like MRI machines, the price of treating many ailments will rise

Medical inflation

• A medical care consumer price index (CPI) measures changes in the price level for medical goods and services– Medical inflation: a rise in the price level for

medical goods and services

• A medical care CPI can tell us how much more it costs this year to buy the same things we bought last year

Medical care CPI• In the last thirty years, the U.S. medical care

CPI has remained consistently higher than overall inflation

Where do I find information on medical care prices in the U.S.?

• Visit http://www.bls.gov

Calculating the medical care CPI

• Create a bundle of goods and services– Bundle should approximate typical

consumption of goods and services demanded

• Compare the total of cost of this bundle this year to the total cost last year

A Price IndexA price index: to compare the cost of a fixed basket of goods in one time period to the cost of the exact same goods in another time period, the base year.

Steps for calculating a price index: 1) Choose the basket of goods to be analyzed and the quantities of each – “Fix” the basket.

2) Find the prices of each good.

3) Choose a base year and a comparison year.

4) Complete the basket’s cost.

5) Compute the price index.

4

10

100

2

Products:

Total Quantity

PurchasedPrices in

2000

Total Expenditures

in 2000Prices in

2005

Total Expenditures

in 2005

Gasoline

Clothes

Food

Medical Care

$1.50

50

10

1,000

$6

500

1,000

2,000

$3,506

$4.00

40

16

1,500

$16

400

1,600

3,000

$5,016

Dollars needed for Market Basket:

2000

2005

$3,506

$5,016

2000 ($3,506 / $3,506) x 100 = 100

Price Index in Each Year:

(143 – 100) / 100

Inflation Rate from 2000 to 2005:

[ ] x 100 = 43%

($5,016 / $3,506 ) x 100 = 143 2005

The composition of the CPI’s “basket”

16.2%

40.0%

4.5%

17.6%5.8% 5.9%

2.8%

2.5%

4.8%

Food and bev.

Housing

Apparel

Transportation

Medical care

Recreation

Education

Communication

Other goods andservices

1995 - 2005 (1982-84 = 100)

A ll Item s A ll Item s Les s M edic al Care Food and B everages Hous ing1995 152.4 148.6 148.9 148.51996 156.9 152.8 153.7 152.81997 160.5 156.3 157.7 156.81998 163.0 158.6 161.1 160.41999 166.6 162.0 164.6 163.92000 172.2 167.3 168.4 169.62001 177.1 171.9 173.6 176.42002 179.9 174.3 176.8 180.32003 184.0 178.1 180.5 184.82004 188.9 182.7 186.6 189.52005 195.3 188.7 191.2 195.7

Cons um er P ric e Index - Urban

M edic al Care P ric e Index1995 - 2005 (1982-84 = 100)

M edic al Care Com m odit ies S ervic es P res c ript ion Drugs

1995 220.5 204.5 224.2 235.01996 228.2 210.4 232.4 242.91997 234.6 215.3 239.1 249.31998 242.1 221.8 246.8 258.61999 250.6 230.7 255.1 273.42000 260.8 238.1 266.0 285.42001 272.8 247.6 278.8 300.92002 285.6 256.4 292.9 316.52003 297.1 262.8 306.0 326.32004 310.1 269.3 321.3 337.12005 323.2 276.0 336.7 349.0

Inflation

• CPI– The CPI is a price index, or a measure of the

average level of prices relative to prices in the base year.

• Rate of Inflation– The annual percentage rate of change in the price

level, as measured, for example, by the CPI

CPI, consumer price index, measures the cost of a “marketbasket” of consumer goods and services over time.

0

20

40

60

80

100

120

140

160

180

200

1913

1920

1930

1940

1950

1960

1970

1980

1990

2000

Con

sum

er p

rice

ind

ex (

1982

-198

4 =

100

)

Source: The CPI Home page of the U.S. Bureau of Labor Statistics at http:\\ftp.bls.gov\pub\special requests.cpi\cpia.html

Two measures of inflation

-4

-2

0

2

4

6

8

10

12

14

16

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Percentage change

GDP deflator Consumer Price Index

Interpreting the Medical CPI

• Potential Problems with the Medical CPI– Technological change

• Original bundle no longer reflects actual purchases

– Ex: blood transfusions are now much safer than they were 50 years ago due to improved screening techniques

– Ex: polio vaccines have replaced treatments like the iron lung

1984 2004

% increase

Nominal Expenditures(thousands of U.S. $)

$816 $11,763 1,341%

Real 1984 Expenditures in 2004 Dollars

= Nominal 1984 Expenditures x (Price Index in Current Year Price Index in Earlier Year)

Real Expenditures(thousands of U.S. $)

Price index (Medical PI, 1982-84 = 100)

100.0310.1210%

$11,763

To inflate an expenditure value from an earlier year:

= $816 x (310.1 / 100.0) = $2,530

$2,530

365%

Florida Medicaid Expenditures

2000 2005

% increase

Nominal Hospital Expenditures(thousands of U.S. $)

Real Expenditures

$417.0 $611.6

Price index (Medical PI, 1982-84 = 100) (thousands of U.S. $)

317.3439.9

1. What was the rate of inflation for medical care from 2000 to 2005?

2. After adjusting for inflation between 2000 and 2005, what is the real value of spending on hospital care in 2000, using 2005 dollars? In which year did persons purchase more hospital care?

3. Explain how one should interpret the meaning of the real value of spending in 2000, using 2005 dollars.

Your turn! Try to answer the following:

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