Higher expenditure growth can arise for three reasons. Either the price of the service is increasing; the quantity of the services consumed is increasing; or a combination of both. In the case of health care, it is a combination of both, but especially of rising prices. Specifically, the total quantity of goods in the U.S. economy increased 377 percent between 1960 and 2008. The total quantity of medical services increased 712 percent or less than twice as much. However, prices in the U.S. economy increased just 490 percent, while prices of medical services soared 1,239 percent-nearly 2.5 times as much.
Figure 9 compares the rising medical prices and medical consumption to total national medical expenditures. The rising national medical expenditures is clearly a combination of both rising costs and rising consumption, but rising costs are clearly the major driver of rising health care expenditures.
Figure 10 illustrates the high growth in health care costs compared to inflation since 1998. Rising prices for medical and hospital services are driving medical inflation. The fact that the cost of medical and hospital services are driving price increases for medical care is not unexpected. These are the sectors most burdened by regulations and affected most by the insurance market. It is, consequently, expected that the areas subject to the largest excessive price pressures are the markets most affected by the insurance issue. In fact, those markets least affected by insurance-medical services related to eye glasses-are precisely the health care costs exhibiting the least amount of price pressures.
Figure 11 relates the medical price inflation back to the wedge and adverse incentives created by the current system. When expenditures that are covered by either the insurance company or the government increase relative to national health expenditures, medical price inflation accelerates. When these expenditures fall relative to national health expenditures, medical price inflation slows. Accelerating medical inflation, consequently, is strongly correlated with a growing separation (wedge) in the medical market between doctors and patients. Reform policies that increase this separation, such as those reforms based on President Obama's priorities, can be expected to increase pressures on medical price inflation.
27 Bureau of Economic Analysis, National Income and Product Accounts, Tables 1.5.3 and 1.5.4, www.bea.gov Centers for Medicare & Medicaid Services, Office of the Actuary: Data from the National Health Statistics Group.
28 Bureau of Labor Statistics, www.bls.gov.
29 Author calculations based on Bureau of Economic Analysis data.
