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Cost of Medical Care Outstrips Inflation

John Commins, for HealthLeaders Media, April 14, 2010

The cost of hospital services, which grew by 1.1% in March and 8.6% in the last 12 months, almost quadruple the 2.3% increase in the overall Consumer Price Index for the same period, the Bureau of Labor Statistics announced today.

A further breakdown shows that the cost of hospital inpatient services rose 1.6% in March and 9.5% for the past 12 months, while the cost of hospital outpatient services rose 0.6% in March and 7.4% for the past year. Seasonally adjusted CPI data for all urban consumers also show that the overall cost of all medical services grew by 0.3% in March and 3.8% in the last 12 months.

The rising costs of virtually every healthcare-related index have easily outstripped overall CPI for decades. "I'm sure a lot of people have different opinions on why. In my opinion, a lot of it is demand-related," says BLS economist Steve Reed.

"Healthcare has just gotten better over time. There are more drugs that work. There are more treatments that work effectively. Despite our recent economic struggles, we have gotten richer over time," Reed says. "So, if you are becoming wealthier as a society and your healthcare sector is innovating and becoming better, naturally there is more demand for healthcare and that puts upward pressure on healthcare goods."

Adding to that upward pressure, Reed says, is a lack of financial disincentives to reduce consumer demand. "When we buy healthcare, we are not paying the whole cost of what we buy so we don't face the same incentives to limit our healthcare purchases, so that affects demand," he says. "In addition, demand for a lot of healthcare is very inelastic. If you have market power and inelastic demand generally the profit-maximizing price you charge is very high."

The CPI data also show that:

  • The cost of physician services fell 0.1% in March, but rose 3.2% in the last 12 months.

  • The cost of prescription drugs rose 0.6% in March, and 4.9% in the last 12 months.

  • The cost of nursing home and adult day care services rose 0.3% for the month, and 2.8% for the last 12 months.

The CPI is a measure of the average change in the prices of goods and services purchased by households. CPIs are based on prices of food, clothing, shelter, fuels, transportation fares, charges for doctors' and dentists' services, drugs, and other goods and services that people routinely buy.

Prices are collected each month in 87 urban areas across the country from about 4,000 homes and approximately 25,000 retail businesses, hospitals, and other service providers.


John Commins is a senior editor with HealthLeaders Media.

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