Affordability and an Abundance Agenda for US Health Care
Photo by Hush Naidoo Jade Photography
One of the things that should bother economists more than it seems to is the loud chorus of complaints about affordability. Since wage growth has consistently outpaced inflation for the last several years, especially for the lowest paid workers under Biden, it seemed things should be getting more affordable, not less.
I have seen the rejoinder that people are not paying attention to rising prices, the rate of inflation, they are upset that prices are high. This argument does not seem very convincing. In the 1980s, when inflation slowed from close to 10% at the start of the decade, to 3-4 percent in the middle of the decade, most people seemed pretty happy that inflation was back at a manageable level.
I don’t recall any accounts of anger because prices were still high. It seemed no one expected prices to fall back to their early 1970s levels, before inflation took off. To be clear, there surely were people who wanted to see prices fall back 30-40%, but these people and their unrealistic hopes were not highlighted in the media. Instead, the story was that inflation was down and things were good.
It seems unlikely that Americans think so much differently today than they did four decades ago. If they were fine with much higher prices, as long as inflation was down, back in the 1980s, I’m inclined to think this would also be the case today.
But consumers really do seem to be experiencing distress, quite apart from what the media choose to highlight. My quick and dirty measure of the typical household’s financial situation, real spending in fast-food restaurants, is not showing a pretty picture. It is virtually flat over the last year and is actually down 2.4% since September. That would suggest some real hardship. (There also has been a big rise in credit card and auto loan delinquencies.)
Just to be clear on the reason for my fondness for the McDonalds meter, we have a problem with most categories of consumption. They are, or can be, driven by the spending of the top income quintile who have big stock gains. My working assumption is that when the price of Tesla stock goes up, Elon Musk is unlikely to increase his consumption of Big Macs. The rise or fall in spending on fast-food restaurants is driven primarily by whether ordinary workers feel they can afford to eat out rather than cook at home.
The Health Care Story
As I noted in a short post last month, health care inflation as measured by the Consumer Price Index (CPI) bears almost no relationship to health care costs that people experience. The CPI measure picks up price changes in specific drugs, like Prozac or Prilosec, and specific procedures like hip or knee replacements. Since people tend not to be repeat buyers of these items (especially the procedures) they would not have a clue about their price inflation.
What they do see is what they pay for health care. That would be out-of-pocket spending on prescription drugs and other items, co-pays and deductibles, and premiums for insurance. These have almost certainly been rising far more rapidly than the CPI measure of health care inflation. This is the picture since 2020.1
This may not fully explain the affordability complaints, but health care is a substantial share of people’s overall spending (its weight in the CPI is 8.4%). If inflation in this category is several percentage points higher than what the CPI measure shows, it would mean the inflation people see is considerably higher than the official measure. This would be especially true for low and moderate-income households, who spend a larger share of their income on health care.
The Abundance Agenda for Health Care
I have written before on how we can bring our health care costs down to earth. We pay twice as much for our drugs and medical equipment as people in other wealthy countries. We also pay twice as much for our doctors. And we have a ridiculously bloated insurance system that both costs hundreds of billions of dollars to operate and drives everyone nuts dealing with bureaucracy and paperwork.
This is a case where a free market could work wonders. We could stop relying on patent monopoly financing, and instead pay for the development of drugs, vaccines, and medical equipment upfront through public funding, which we already do to a large extent with the NIH and other government agencies. If these items were all sold in a free market, without patent monopolies, they would be cheap.
Similarly, we could remove the barriers that make it difficult for foreign physicians to practice medicine in the United States. These barriers block even highly trained physicians from other wealthy countries. If we brought the pay of our doctors down to the levels in France or Canada, it could knock well over $100 billion a year ($800 per household) from our medical bill.
And we could establish a universal Medicare-type system, which would save us at least $400 billion each year on needless bureaucracy. These changes are interactive. For example, expensive drugs provide a motivation for an insurance or government bureaucracy to limit access. If drugs are cheap, there is little reason to get in the way of providers prescribing the drug they consider best for their patient.
Anyhow, it’s not hard to envision an abundance agenda that would make health care most affordable. Unfortunately, it means kicking some very powerful interests in the face. So don’t bank on this one any time soon.
Notes.
Health care spending for this calculation is the sum of spending in Table 2.4.5U, Lines 66,121, 172, and 275. Actual spending by households will rise more rapidly insofar as payments by employers or the government do not keep pace with the increase in health care cost growth.
This first appeared on Dean Baker’s Beat the Press blog.
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