1. Adjusting for Changes in Medical Care Prices Over Time

2. Average Annual Worker and Employer Contributions to Premiums and Total Premiums for Family Coverage, 1999-2011 * Estimate is statistically different from estimate for the previous year shown (p<.05). Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2011. $5,791 $6,438* $7,061* $8,003* $9,068* $9,950* $10,880* $11,480* $12,106* $12,680* $13,375* $13,770* $15,073*

3. What are health care costs? When we speak of “health care costs,” we really mean total health expenditures Equation for medical expenditures E: E = P · Q E is expenditures on medical care P is the price of medical care Q is the quantity of medical care

4. E = P x Q Hypotheses to explain rising expenditures: –Prices have increased –Quantity demanded has increased –Technological innovations and technological overuse

5. Quantity may be increasing An aging population –people demand more health care as they age A richer population –rising incomes lead to more health care consumption More insurance coverage –More insurance reduces out-of-pocket prices to patients of obtaining medical care Increasing quality of medical care –Technology improves quality of life but is a large contributor to increasing costs in health care

6. Are rising costs a bad thing? If rising costs are due to rising demand –rising health care costs is not necessarily a bad thing –People are not necessarily worse off If rising costs are due to rising prices –Rising costs does harm consumers –Health is getting more expensive to produce, so people will either have to cut back on health care or spend more money to stay healthy

7. Prices may be rising, because… Increased resource costs Less competitive markets –Hospital mergers may have made the market more monopolistic Expensive new technology –if modern medical care routinely incorporates new, expensive technologies like MRI machines, the price of treating many ailments will rise

8. Medical inflation A medical care consumer price index (CPI) measures changes in the price level for medical goods and services –Medical inflation: a rise in the price level for medical goods and services A medical care CPI can tell us how much more it costs this year to buy the same things we bought last year

9. Medical care CPI In the last thirty years, the U.S. medical care CPI has remained consistently higher than overall inflation

10. Where do I find information on medical care prices in the U.S.? Visit http://www.bls.gov

11. Calculating the medical care CPI Create a bundle of goods and services –Bundle should approximate typical consumption of goods and services demanded Compare the total of cost of this bundle this year to the total cost last year

12. A Price Index A price index: to compare the cost of a fixed basket of goods in one time period to the cost of the exact same goods in another time period, the base year. Steps for calculating a price index: 1) Choose the basket of goods to be analyzed and the quantities of each – “Fix” the basket. 2) Find the prices of each good. 3) Choose a base year and a comparison year. 4) Complete the basket’s cost. 5) Compute the price index.

13. 4 10 100 2 Products: Total Quantity Purchased Prices in 2000 Total Expenditures in 2000 Prices in 2005 Total Expenditures in 2005 Gasoline Clothes Food Medical Care $1.50 50 10 1,000 $6 500 1,000 2,000 $3,506 $4.00 40 16 1,500 $16 400 1,600 3,000 $5,016

14. Dollars needed for Market Basket: 2000 2005 $3,506 $5,016 2000 ($3,506 / $3,506) x 100 = 100 Price Index in Each Year: (143 – 100) / 100 Inflation Rate from 2000 to 2005: [ ] x 100 = 43% ($5,016 / $3,506 ) x 100 = 143 2005

15. The composition of the CPI’s “basket”

17. Inflation CPI –The CPI is a price index, or a measure of the average level of prices relative to prices in the base year. Rate of Inflation –The annual percentage rate of change in the price level, as measured, for example, by the CPI

18. CPI, consumer price index, measures the cost of a “market basket” of consumer goods and services over time. Source: The CPI Home page of the U.S. Bureau of Labor Statistics at http:\\ftp.bls.gov\pub\special requests.cpi\cpia.html

19. Two measures of inflation

20. Interpreting the Medical CPI Potential Problems with the Medical CPI –Technological change Original bundle no longer reflects actual purchases –Ex: blood transfusions are now much safer than they were 50 years ago due to improved screening techniques –Ex: polio vaccines have replaced treatments like the iron lung

21. 1984 2004 % increase Nominal Expenditures (thousands of U.S. $) $816 $11,763 1,341% Real 1984 Expenditures in 2004 Dollars = Nominal 1984 Expenditures x (Price Index in Current Year Price Index in Earlier Year) Real Expenditures (thousands of U.S. $) Price index (Medical PI, 1982-84 = 100) 100.0 310.1 210% $11,763 To inflate an expenditure value from an earlier year: = $816 x (310.1 / 100.0) = $2,530 $2,530 365% Florida Medicaid Expenditures

22. 2000 2005 % increase Nominal Hospital Expenditures (thousands of U.S. $) Real Expenditures $417.0 $611.6 Price index (Medical PI, 1982-84 = 100)(thousands of U.S. $) 317.3 439.9 1.What was the rate of inflation for medical care from 2000 to 2005? 2.After adjusting for inflation between 2000 and 2005, what is the real value of spending on hospital care in 2000, using 2005 dollars? In which year did persons purchase more hospital care? 3.Explain how one should interpret the meaning of the real value of spending in 2000, using 2005 dollars. Your turn! Try to answer the following: 47%