Affordability and the Health Care Crisis

One of the issues that bothered many economists, including me, were the complaints that people were falling behind — even as the data on wages and inflation consistently showed that wages were outpacing prices, especially for those at the bottom end of the wage distribution.  Part of this story was clearly a right-wing effort to trash the Biden economy before the election.

My Twitter feed was full of people working two or three jobs, but who still couldn’t make ends meet. All of these people disappeared after the election. The effort worked well, since it got major news outlets to echo the line fueling disinformation about what the data showed.

But we do keep hearing about hardship even as the data continue to show wages outpacing inflation and the right-wing noise machine is pushing in the other direction. So, can there be something there?

We all know that the Consumer Price Index (CPI) is not a perfect match for the cost-of-living. For example, the CPI adjusts for quality changes which may have little to do with how consumers perceive the products they buy. For a period of time at the end of the 1990s and start of this century, its measure of quality improvements for computers had their prices declining by more than 30 percent annually. This measure may have accurately picked up perceptions of quality gains for cutting-edge users, but probably not for 99 percent of the people who were buying computers at the time.

There are also changes in the world that may hugely affect the cost of living that people see but not be picked up in the data. If a bus route is cancelled so that some workers must either drive to work or take a taxi, that is a big increase in those people’s cost-of-living that is not picked up in the CPI. Similarly, if people perceive a deterioration in public school quality, so they have to send their kids to private schools, this additional cost would not be picked up in the CPI.

The cost of medical care also poses huge problems for the CPI. The CPI measures the price changes for specific items, like the cost for hip replacement surgery or the price of Celebrex, but it doesn’t measure what people actually pay for health care. This is a problem for two reasons. First, most people probably do not think of their health care spending as being a mix of different procedures and pills. They likely think of health care spending as a chunk of money that comes out of their pocket. If their doctor switches them from one medication to another, they are more likely to care that the second one costs more than the first, not that the price of the second drug might have fallen 10 percent over the last year.

The other problem with the CPI measure is that most people have most of their payments for medical care come from insurance — whether self-purchased, employee provided, or from the government. What matters to patients is what they have to cough up themselves, not what their insurers pay. The CPI does not pick up at all an increase in out-of-pocket payments due to higher copays, deductibles, or increased us of uncovered care.

This could be a substantial factor missing in the affordability debate. My CEPR colleagues, Emma Curchin and John Schmitt, did a paper looking at people’s payments for medical care. They summed copays, deductibles, direct payments, as well as premiums paid directly by families. It came to almost $4,000 a year in 2024.

Total spending on health care has been rising at a rate of more than 7.0 percent annually the last three years. By contrast, the CPI measure has been increasing at just a 3 percent annual rate. If people’s outlays for medical care have tracked total spending, then the CPI measure substantially understates the increase in medical inflation they are experiencing. In fact, the story could be even worse, if insurers are increasingly shifting costs to families, then the increase in their payments would exceed the overall rate of health care cost growth.

If we are substantially understating the rate of health care inflation that people are seeing, then we would be overstating the rate of real wage growth. This may not be the full story of complaints about affordability, but it could help to explain the gap between the data and public perceptions.

This first appeared on Dean Baker’s Beat the Press blog.

The post Affordability and the Health Care Crisis appeared first on CounterPunch.org.