Eric Rall produces a graph of the increases of prices in healthcare compared to the prices of other goods and services in the U. S. economy over the last 50 years and wonders what changed in the early 1980’s? I have a more complicated answer to his question but the simple answer is the same one as he gave to my musings about post-war trends in U. S. GDP: the trajectory in healthcare costs is produced by compounding. When costs increase at a more or less fixed rate year on year, that’s what the curve looks like.
The more relevant question is why don’t other areas of the economy show the same behavior? For that I have two answers. First, there is no functioning market in healthcare but there is in other goods and services. Second, China formally changed its policy of autarky in 1979.
Update
For those of you who can’t reach the graphic it’s here. I didn’t want to steal Eric’s thunder.
Dave, can you host the picture? I can’t see it because it is on photobucket (net nanny)?
Well, like you said its complicated. Many goods have substitutes. Beef prices getting too high? Well you have chicken, pork, and fish as substitutes. Heck you could even reduce all meat consumption and turn to soy for your protein (tofu anyone?). Another example is copper and fiber optic cable. Health care on the other hand doesn’t have many substitutes. Further, the market for health care is in many ways messed up. The number of doctors is not determined by supply and demand, and there are serious impediments to increasing the number of nurses. Drugs are subject to intellectual property and thus are not like most other goods that don’t enjoy a monopoly status (at least for a few years).
I hope you are all sitting down…………………
And of course the consumer has been almost entirely shielded from the cost of health care services or the real costs of the insurance that pays for those services.
Not in dental, Drew, which is why I incline to my pricing mechanism hypothesis.
I’m confused by what the graph is telling us about dental costs. I thought dental expenditures have tracked (and possibly done better) than CPI?
Is it a case that the price of dental services have gone up just as much as other forms of medical care, but preventative care (fluoride, sealants, etc.) have reduced average expenditures?
Another part of the answer I believe, lies in DRGs. Prior to their introduction, insurance companies paid what was charged, or some agreed upon daily rate. With DRGs, prolonged hospital stays went away as a matter of routine. Hospitals and physicians responded by bringing in the professional management people. Medicine became more of a business than it ever had before. CAT scanners and MRI suites came to be seen as revenue centers rather than a means towards diagnosis. ORs became revenue centers also. Medicine learned to build up those areas to make more money. Medicine learned to create demand.
I would also not underestimate major tech changes that occurred in the 80’s. Major changes occurred in perioperative care so that people who used to be deemed to old or too sick for procedures could now have them. ICU care spread rapidly. Prior to CAT scans and MRIs (should probably include US here also) you could not diagnose much of what we can now. IOW, it was not just the expense of the procedures them selves, but the multiplier effect of enlarging the market. In this category I would also include fiberoptics (endoscopies) and the improved plastics that let us care for more patients who would have just died in the past (cath procedures and IR procedures).
The part of the picture I have not seen analyzed much: what happens if you have a medical procedure that costs more, but returns a patient to productivity sooner? You see these studies in the medical literature some, but seldom in the general economics literature. In this category you might place our laporoscopic and thoracoscopic procedures. The equipment for these is pretty costly. However, patients return to work much sooner.
Steve