Health Care Expenditures Have Not Stopped Increasing

by: Steven Hansen

When I read informed opinion on health care costs going up or going down, I visualize the scenes in the Exorcist (Linda Blair's head rotating a complete 360 degrees or her pea soup hurling). It really depends on what data set you pull, how you view the data in that data set, or if you are really looking for the truth (and not just trying to "prove" Obamacare is good or bad).

Going back to Professor Krugman's now infamous statement:

The health exchanges are off to a famously rocky start, but many, though by no means all, of the cost-control measures have already kicked in. Has the curve been bent? The answer, amazingly, is yes. In fact, the slowdown in health costs has been dramatic.

If one is trying to convince you that health care costs are falling, the "go to" place is the health sector data in the Consumer Price Index.

Figure 1 - Change in Medical Care Costs - Index (blue line, left axis) and Year-over-Year Change (red line, right axis)

FRED Graph

Figure 1 "proves" that the rate of growth of medical care prices have been decelerating - although it also proves health care prices are still rising. One pundit, using the medical care components of the PPI and PCE, argued the opposite:

"Healthcare inflation has begun to accelerate," wrote Deutsche Bank's Joe LaVorgna pointing to the new producer price index numbers. "The price of "selected health care industries" rose +0.3% in January following gains of +0.2% in December and +0.3% in November."

These numbers are likely to have an amplified effect when we get an updated reading on the PCE deflator, the preferred inflation measure of the Federal Reserve.

Figure 2 - Graph Accompanying above quote

I am at a loss why one would use change in price to argue that medical care costs are falling or rising. We are not talking about coffee here where the usage is relatively stable. The more procedures performed and the more pills popped, the more money will be spent on medical expenses. For medical expenditures, it does not matter that the costs for a particular pill or procedure are inflating slower or faster - as medical expenditures are more sensitive to the NUMBER of procedures performed or pills popped.

Figure 3 - Indexed Health Care Expenditures (blue line) vs. Indexed Personal Income (red line)

FRED Graph

In the 21st century, health care expenditures for Joe and Jane Sixpack have been taking more and more of their income. It just keeps growing at about the same rate. Unfortunately, income is not growing at the rate of medical expenditures.

Worse, Figure 3 is AVERAGE personal income (influenced heavily by the 0.1%). Here is the same data set for health care expenditures versus MEDIAN income.

Figure 4- Indexed Health Care Expenditures (red line) vs. Indexed Personal MEDIAN Income (blue line)

Whether Obamacare eventually starts affecting the rise in medical expenditures or not, a crisis in medical expenditures is already underway. The root causes for the rise in consumer expenditures are yet to be addressed, and may be much more urgent than fixing the defects in Obamacare.

My usual weekly economic wrap is in my instablog.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.