Obamacare and "health inflation"

3/09/2015 08:31:00 AM
The term "healthcare inflation" is one that makes my skin crawl--an increase in relative prices is not inflation!--but nevertheless a major talking point about healthcare reform. Chris Conover has a piece criticizing Obamacare supporters for prematurely crediting the ACA with reducing--argh--healthcare inflation.

Conover has a pretty good point. For all the bluster, healthcare prices actually track the general price level in the economy pretty well, and so with the disinflation caused by the Great Recession, we've seen a corresponding decrease in the rate of price increases in the healthcare sector. Which is to say, much of the decrease in growth in health prices has been a decrease in inflation, rather than the decrease in relative prices that supporters of the ACA boast.

Conover offered a version of this graph, but I felt it was unfairly missing the 0-axis in his version:
"Excess" healthcare price increases, measured as the difference between year-over-year increases in healthcare prices and year-over-year increases in overall price level.
You can see that the trajectory after the Great Recession has been pretty erratic. After the trough but before the ACA, there was an explosion in the relative prices of healthcare, and after the ACA the "excess inflation" in healthcare essentially vanished--for roughly the past four years, the relative price of healthcare hasn't risen at all.

Like Conover, I'm reluctant to credit the ACA for this. I've always felt that the cost-control provisions of the ACA were pretty weak, and that other aspects of the law--such as expanding health coverage and boosting demand--were likely to increase healthcare prices further, so that significant reductions in health price increases were unlikely. And any quarter now, we could see the line in that graph spike back up, like it did throughout the 1995-2010 period. But here's the point that Conover misses: if that spike doesn't happen, then years from now it will be very hard not to credit the ACA for that change. In fact, we did have a characteristic price spike after the recession and before the ACA that could suggest it wasn't the recession that caused the change.