+

Cookies on the Business Insider India website

Business Insider India has updated its Privacy and Cookie policy. We use cookies to ensure that we give you the better experience on our website. If you continue without changing your settings, we\'ll assume that you are happy to receive all cookies on the Business Insider India website. However, you can change your cookie setting at any time by clicking on our Cookie Policy at any time. You can also see our Privacy Policy.

Close
HomeQuizzoneWhatsappShare Flash Reads
 

Health Care Cost Inflation Is Tumbling

Oct 24, 2013, 04:25 IST

Business Insider / TD Securities

One of the more overlooked stories of the post-financial crisis economy is the drop in health care cost inflation.

Advertisement

"Medical care expenditures account for over 20% of personal consumption, and the dramatic secular downtrend in health care costs has been a key driving force behind the moderation in core PCE inflation since 2012 - which now hovers well below the Fed's 2.0% Y/Y target," said TD Securities' Millan Mulraine to Business Insider.

Much of this has been attributed to favorable structural changes like improved hospital efficiencies, increased use of generic drugs, and declining hospital readmission rates.

However, falling health care inflation may also reflect unfavorable cyclical forces. Maury Harris, UBS's top economist, wrote about this in a recent note to clients (emphasis added):

There are at least two implications if the slowdown in medical care inflation mainly reflects cyclically weaker health care spending stemming from relatively high unemployment and lesser or delayed spending by the uninsured. First, for the time being, slower medical care inflation could be signaling the effects of still high unemployment on consumer spending that can be postponed. In other words, slowing health care inflation might be a sign of continued sluggishness in the overall economy. Second, if slower medical care inflation mainly represents postponed health care demand, such inflation should start to re-accelerate as further unemployment reductions enable more venting of delayed (i.e., "pent-up") healthcare demand.

Advertisement

But Harris doesn't dismiss the long-term structural argument either.

If slower healthcare inflation instead reflects longer-run and sustained changes in how the healthcare system operates, lesser health care inflation could become a more enduring characteristic of the U.S. economy. Examples of such changes could be Obamacare, improved bargaining power for third-party private and government purchasers vis-a-vis healthcare suppliers and more price comparison shopping by individuals.

A long-term cooling of health care costs inflation would be welcome by Americans, and it would also be a gamechanger for policy.

"If Obamacare succeeds in lowering healthcare costs further then it will have important implications not only for fiscal policy, but the disinflationary impulse will also continue to provide a favorable backdrop for the Fed to maintain its u¨ber-accommodative policy stance for longer," said Mulraine.

You are subscribed to notifications!
Looks like you've blocked notifications!
Next Article