Tobias Fleckenstein Economics of Health Care (Eco 7550 ) 1 09/23/2013 Medical-Price Inflation is at slowest Pace in 50 Years By Eric Morath and Louise

Tobias Fleckenstein Economics of Health Care (Eco 7550) 109/23/2013

Medical-Price Inflation is at slowest Pace in 50 Years

By Eric Morath and Louise Radnofsky

Wall Street Journal, September 17, 2013

Presented by Tobias Fleckenstein

http://online.wsj.com/article/SB10001424127887323342404579081312680485476.html

http://online.wsj.com/article/SB10001424127887323342404579081312680485476.html


Medical Price Inflation and Inflation Rate

Health Care Inflation, Consumer Price IndexSource: The Wallstreet Journal


Some Facts about Medical Price Inflation

Medical price inflation is highly positivly correlated to inflation rate (CPI)

In 2013, medical price inflation has reached its lowest level since 50 years

In 2013, medical price inflation is lower than the inflation rate (CPI) (this case was similar in history)

Medical prices have a huge influence on government and business‘ budgets a permanent low medical price inflation relieves government and business‘ expenditures

Health care price increases can be caused by inflation and/or technological change. Consequently, it is difficult to identify the main reason for medical price inflation


Reasons for low Medical Price Inflation in 2013

The current low inflation rate causes the low medical price inflation rate and inverse (econom.: simultaneity)

Due to the increasing availability of generic drugs, prescription drugs are becoming cheaper. Employees are forced to buy generic drugs by the enterprises increasing competition on the drugs market

In regard to an increase in high-deductible health care, consumers compare prices increasing competition on health care market

The effect of Affordable Care Act (ObamaCare) on medical price inflation is unclear

Hospital prices for medicare patients are trending slightly below last year‘s levels

Prices for nongovernment patients went up 4.5% in August from a year ago

1.

2.

3.


PwC‘s 2013 Health Survey

Strong increasing percentage and amount of deductible medical plans

People with high-deductible medical plans compare prices on the internet (new.choice.health.com) or using apps (healthcarebluebook.com)

Example: cardiac perfusion imaging in Chicago (in USD)


Economic explanation for government intervention

Monopoly Power

Calculation: π(Q) = p(Q) x Q – C(Q) − = 0 MR = MC

Increasing competition reduces inflation rate and increases welfare!

Deadweight-Loss p

Q


D

Deductible Health Plan – Welfare-Improvement?

45°

B

C

yi

yh

𝑰𝑪𝒍𝟏

𝑰𝑪𝒍𝟐

𝑰𝑪𝒍𝟑

𝑰𝑪𝒉𝟐

𝑰𝑪𝒉𝟏

= Two groups: high- and low risks

Perfect Information: Eq. A & B

Imperfect Information:

(1) Pooling-Eq. C

(2) Separating Eq. A and D

Low risks increase utility level,

beacause of that, high risks

utility falls since no insurance

company will supply an

insurance at given level

Especially low risks can increase their utility by deductible health plans


Conclusion and Prediction

The low medical inflation rate in 2013 is probably caused by the current low inflation rate, an increased availability of generic drugs and the increasing amount of deductible health plans

A regression analysis could estimate the particular influences on inflation (problems: data, autoregression, omitted variable bias)

From an economic point of view, generic drugs and deductible health plans can create competition that increases welfare and relieves government and business‘ budgets

The number of deductible health plans has doubled over the last 5 years. Low risks can increase their utility level by agreeing to deductible health plans. Regarding risk aversion, people prefer the possiblity of pooling agreements

It is difficult to predict medical inflation rates for the future, but two digit numbers should not be reached anymore

Documents

Tobias Fleckenstein Economics of Health Care (Eco 7550 ) 1 09/23/2013 Medical-Price Inflation is at slowest Pace in 50 Years By Eric Morath and Louise