A few days ago I posted on Robert Fogel’s analysis of healthcare as a luxury good, i.e. a good on which more is spent proportionately as incomes rise. At that time I suggested that the hypothesis was wrong but was susceptible to proof:
If his assertion is true in the short term we should expect a nearly 2% decline in healthcare spending nationally. I’m willing to bet a bright, shiny new dime that won’t be the case.
According to the BEA incomes are likely to have declined by about 1% through the end of the year. Does this mean that healthcare spending is likely to decline by 1.6%? Apparently not:
Health care costs are expected to increase by more than 10% in 2010 for employer-sponsored plans, according to separate surveys by two benefit consultants.
Aon Consulting, a unit of Chicago-based Aon Corp., projects an average 10.5% increase based on input from more than 60 leading health insurers representing more than 100 million insured individuals. The rate increases will average 10.4% for health maintenance organizations and point-of-service plans, 10.7% for preferred provider organization plans and 10.5% for consumer-driven health plans, according to the survey.
The trend rates projected by Aon are slightly lower than they were for 2009 for HMOs and POS plans, and the same rate of increase as last year for PPOs and CDHPs.
According to a survey by New York-based Segal Co., cost increases for managed care plans in 2010 will be about the same as in 2009, ranging between 10.2% and 10.8%, and high-deductible CDHPs will increase 11.9% next year, which is about 1% more than in 2009.
That’s not the behavior of a luxury good. Quite to the contrary I think it’s the behavior of a good that is rising without reference to incomes, a quality that I would assert can only take place in the absence of a functioning market. I think it also effectively refutes Dr. Fogel’s point and I wish that some economists would take him to task for it.
It would be interesting to break that increase down. I would bet that you would not see a 10% increase in expenditures for actual care, but rather most of that going to pay for insurance. Insurance companies make a lot of their money on their investments rather than premiums. They are in the hole like everyone else. Private insurance companies have not shown themselves able or willing to hold down costs.
Steve
Dave, I’m not sure you are making an apples to apples comparison here.
For starters, you (and Arnold King) change Fogel’s “demand for healthcare is 1.6—for every 1 percent increase in a family’s income” into “it is going to get rather difficult to increase spending on health care by 1.6 percent for every 1 percent increase in GDP. ”
Since GDP takes into account much that factors very little into “family income” I’m not sure this comes out to be a suitable substitution. In fact I am sure it is unsuitable.
I’m not saying Fogel is right (I’ve no idea) but I don’t think looking at GDP gives you the correct method to measure it. (For example, according to the BEA between Q1 of 2008 and Q1 of 2009 personal income went down in only 7 states – AZ, CA, CT, FL, ID, NV, & NJ – it went up in 42 states and DC, and remained constant in SD. At the same time the GDP was dropping – apart from a little blip up Q2 2008.)
Also when you stated, “Perhaps the key factor is “long-termâ€. I would remind Dr. Fogel that in the long run we are all dead. Why should there be a difference between the long-term and short-term income elasticity of the demand?” I think this does a bit of violence to the notion of variability in statistical measures. Just because Albert Pujols hits .320 over the course of a whole season (or for his whole career when it is done) doesn’t mean he wont hit .197 for two weeks (or .465). Just because the immediate future won’t look like the final numbers doesnt mean they both sets of numbers dont tell us something.
You were right in my first post on the subject, Rich, but I changed that in this post to incomes. According to the BEA incomes are falling.
If the issue is “families whose incomes rise”, Dr. Fogel’s argument is even weaker because most families’ incomes haven’t risen in real terms for decades. Increasing income (and GDP) are based on greatly rising incomes for a very small number of families.
“, Dr. Fogel’s argument is even weaker because most families’ incomes haven’t risen in real terms for decades. Increasing income (and GDP) are based on greatly rising incomes for a very small number of families.”
Hooray for supply side economics.
Steve
Steve –
How have the basic tenants of “supply side economics” adversely affected “most incomes,” and how would other economic policies have helped “most incomes?”
steve,
I suggest you look at total compensation which would include health care. If I pay you $5 and a bag of apples, to claim I just paid you $5 is a bit misleading.