Medical Inflation Is Up, But It’s Probably Just a Blip

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Sarah Kliff reports that health care spending ticked upward at the end of 2013:

A four-year slowdown in health spending growth could be coming to an end….Federal data suggests that health care spending is now growing just as quickly as it was prior to the recession.

….The Altarum Institute in Ann Arbor, Mich. tracks health spending growth by month. It saw an uptick in late 2013 that has continued into preliminary numbers for 2014. Separate data from the Bureau of Economic Analysis, which tracks the growth or consumer spending by quarter, shows something similar: health spending grew by 5.6 percent in the last quarter of 2013, the fastest growth recorded since 2004.

Inflation in the final quarter of 2013 ran a little over 1 percent, which means health care spending rose 4.5 percent faster than the overall inflation rate. That’s a lot. But it’s also only one quarter, and it’s hardly unexpected. Take a look at the chart on the right, which shows how much per capita health care spending has increased over and above the inflation rate for the past 40 years. There are two key takeaways:

Medical inflation has been on a striking long-term downward path since the early 80s.
There’s a ton of noise in the data, with every decline followed by a subsequent upward correction.

The HMO revolution of the 90s sent medical inflation plummeting. Then a correction. Then another big drop. And another upward correction. Then another drop. If that’s followed by an upward correction for a few years, it would hardly be a surprise.

Nonetheless, the long-term trend is pretty clear, and it shows up no matter how you slice the data. For many years, medical inflation was running as much as 4-6 percent higher than overall inflation. Today that number is 1-2 percent, and the variability seems to be getting smaller. What’s more, that 1-2 percent number matches the long-term trend during the entire postwar period (see chart below). There’s good reason to think that it might be the natural rate of medical inflation, with the 80s and early 90s as an outlier. That’s where I’d put my money, anyway.