Health Care Costs Aren’t Rising Fast Enough. Wait, What?


Health care costs aren’t rising fast enough for the Fed’s liking, and that may help keep interest rates lower for longer.  But is the problem one of persistent ‘under-inflation’ or simply the result of a bloated system falling in line with other countries’ health care spending per capita?  If the Fed is really concerned that health care costs aren’t rising fast enough, the unpleasant conclusion is that when those costs finally do rise, it might coincide with rising rates–eventually.   Rising costs and rising rates… just what an economic recovery needs, right?  Confused and angry?  Read on…

Bloomberg is reporting that the apparent success of the Patient
Protection and Affordable Care Act (ACA) in bending the cost curve of health
care may not be a complete blessing.  Despite
the concern that has been expressed in recent years over skyrocketing medical
and prescription costs, it appears that we need at least some of those costs

Bloomberg said that the Federal
Reserve is now worried about the nation’s low rate of inflation and “part of
the problem is the sluggish rate of increase in health care costs.”  Newly installed Federal Reserve Board Chair
Janet Yellen and her fellow members are looking at those costs as part of their
interest rate considerations and thinking perhaps they should keep rates at
current near-record low levels.

Price increases excluding food and energy rose only 1.1 percent on an annual
basis in February, down from 2 percent in the preceding 12 months and Bloomberg said medical goods and
health-care services accounted for about one-third of that decrease.  The cost of health-care services rose only
0.8 percent
on an annual basis in February where those costs had averaged 2.6
percent over the previous 10 years.  The
cost of medical goods and drugs dropped 50 basis points from the 10 year
average of 2.7 percent.

It isn’t just the ACA that is effecting costs, although information from
other sources such as Motley Fool
credit new regulations for cutting hospital readmissions and thus reimbursements
for seniors under Medicare.  Medicare reimbursements
were also cut under sequestration and there were a surge of cheaper new generic
drugs arriving on the market last year as patents expired on several popular brand
name medications.  In 2012 drug
manufacturers lost $24 billion in sales (almost 10 times the 2011 total) as new
generics became available and are expected to lose about $14 million this year.
 The generic drugs also carry lower
co-pays for consumers, usually about $10 compared to $50 per script.

Bloomberg said its analysts looked
at government personal consumption exemption (PCE) data and found February’s
1.1 percent core PCE reading matched January’s as the lowest since March 2011.   The Fed’s preferred measure, PCE inflation
which does include food and energy costs, was even weaker, a 0.9 percent
year-over-year pace, less than half the Fed’s 2 percent inflation goal.

Yellen has stated that policy makers fear a lack of inflation could pose
risks to economic performance.  For example low interest rates hurt savers
and insurance lines with long term claim payment obligations such as long-term
care insurance.  There are also
indications that investors are nervous about the prospects for inflation and
have pulled millions out of some popular exchange-traded funds that track its
progress.  Economists also see low
inflation rates making it more difficult for individuals and businesses to pay
off debts and for businesses to boost profits.

Health-care costs, which are about a quarter of the core PCE, are expected
to grow slowly this year with 63 percent of the economists Bloomberg surveyed expecting a slower than historic increase and 8
percent predicting health-care costs will fall. 
Already the rate for physicians’ fees fell from a 1.6 percent increase in
February 2012 to 0.2 percent 24 months later while nursing home costs in the
same period dropped to an increase of 0.3 percent from 1.8 percent.  Bloomberg
said economists have yet to see the ACA lead to any health care cost increases.
Medicare officials, in fact, said recently that they now believe that hospitalization
trends that were previously said to be dropping have done so more than
originally reported.              

The problem appears to be that as Medicare costs and reimbursements
diminish, private insurance companies will follow the government’s lead and
there will be lower reimbursement rates for hospitals, physicians, and all
kinds of health-care related goods and services.       

The downward pressure on health costs may ease a bit this year Bloomberg says, as fewer drug patents
are expiring.  It won’t be enough however
for the Fed to reach its 2 percent inflation goal.   Yellen, in a mid-March press conference told
reporters, “If inflation is persistently running below our 2 percent objective,
that is a very good reason to hold the funds rate at its present range for
longer,” although she did not specify a time frame.  

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