Supply of Medical Services

Slowing medical CPI may not last

The Bureau of Labor Statistics reports that Medical CPI is only 3.2%.  This is less than the 4.1% average inflation rate over the past ten years and the 6.0% average medical inflation rate over the past 30 years.  In most markets, a slowing economy reduces demand and reduces prices (see the recent decline in oil prices).  With the economic slowdown, will medical care get cheaper soon?

Joe Paduda predicts not.  Why?

  1. Insurance.  Less people will have insurance for two reason.  First, as people lose their job, they will also lose their health insurance.  Secondly, as firms profits decline, it is likely that some firms will drop their health insurance benefits. When less people have insurance, this  will lead to more charity care by doctors and less on-time payment by patients.  Doctors will have to raise prices in order to compensate for the increased number of patients who don’t pay their bills.  However, for elective procedures where patients bear most of the cost, physicians may actual decrease costs (see “Red Light Special…“).  
  2. Utilization.  How will the worsening economy affect medical care utilization.  Mr. Paduda claims that as the economy worsens, individuals that still have insurance will “…get all their elective procedures done, prescriptions filled, and preventive care taken care of while still on their employer’s policy.”  However, the causation could go the other way as well.  If you have a health plan with significant deductibles or coinsurance, you may want to forego medical care in order to save more money (since you just lost your shirt in the stock market).
  3. Retroactive Adverse Selection.  With the economy in a downturn, firms are most likely to layoff younger workers with less seniority.  This means that the insurance pool at the firm will be older and more expensive to serve.  Thus premiums increase which could lead to firms dropping health benefits (see point 1).

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