"We Have No Idea What the Inflation Rates for Health Expenditures Really Are"

The driving force behind fears of growing debt in the future is rising health care costs. That's what's behind all the scary projections about future debt burdens. I've said many times that if we solve the health care cost problem, the rest of the budget problem will be relatively easy to fix. And, conversely, if we don't fix the health care cost problem, the other things we do to the budget won't help much at all (while cutting other parts of the budget doesn't fix the debt problem, i.e. the benefits are small, the loss of services could have large costs).

But how much confidence should we have in the health care cost inflation estimates? Is the increase in costs due to quality improvements, which is not inflation, or pure price increases without the accompanying quality changes, which is? If we are going to cut social services such as Medicare based upon the fear of rising healch care costs , we should be aware of how much confidence we have in the estimates of health care inflation.

So how much inflation is there in health care? Mark Bils, an expert on "the intricacies of price measurement," says we really aren't sure but the problem may not be as bad as we think. In either case -- quality changes or pure price increases -- we still have to consider the impact of rising health care costs on the budget. But public policy should be very different if the cost increase is due to the discovery of, say, a cure for cancer rather than pure inflation:

Meyer: What type of prices do you think might have been overestimated?

Bils: Services and healthcare. When you look at healthcare expenditures, you see that inflation is extremely rapid, much more rapid than other inflation rates. But we have no idea what the inflation rates for health expenditures really are. We don’t know! You can’t measure quality of healthcare very well.

If I compare healthcare costs today versus in the year 1800, well, I could go out and buy a bunch of leeches today for almost nothing. And I could have the healthcare I had in 1800. If you had a certain condition and you had $10,000 to get treated at today’s health prices, or $10,000 to get treated at 1960s prices with 1960s technology, I don’t think it’s so obvious that people would want to go back in time to get their important health conditions dealt with. In that sense, you say, I don’t know if there’s inflation. It’s pretty hard to say that there’s been a lot of inflation over the long haul in healthcare. ...

Meyer: So you do believe that healthcare prices have been overestimated?

Bils: Yes, the inflation rate for healthcare prices has been overestimated. It relates to the work I did later on durable goods, like cars. When we get a new model car, the 2011 Camry versus the earlier model, the prices jump. Now, is that inflation, or is it a better model?

The same issue comes up with surgical procedures. If I have a new procedure for treating heart problems, how much better is it? If I look just at the expenditure, the cost of providing that, it goes up a lot. But if the treatments are better, if the bounce-back time to get back to work is faster, how to measure these things is hard to say. And in practice a lot of that is being fed into inflation. ...