What can healthcare prices teach about the problem of inflation?

With inflation reaching a 40-year high, Tammy Ferrell is taking drastic measures to feed his family. Even after replacing meat with noodles and walking to the grocery store to save gas, he has seen himself avoid food to make ends meet. Many more are making similar sacrifices.

Prices have risen an estimated 8.6 percent in the last 12 months. The latest inflation measure is estimated to have pushed prices up 1 percent this May. The price of electricity, which affects the cost of making countless other products, has been a particularly hard hit. The U.S. Energy Index, which measures petrol and natural gas inflation, estimates that fuel prices have risen a worrying 34.6 percent since last April.

The Federal Reserve, which is usually tasked with managing financial affairs in the United States, has slowed optimally in dealing with inflation. This is incredibly frustrating, as economist John Kochran writes Chicago Booth Review “We have faced similar inflation before, and we have successfully tackled it through contractionary monetary policy,” the article said.

What is a holdup?

Unfortunately, tackling inflation can be more of a stimulus problem than a “no policy we should adopt” problem. Public choice provides evidence to examine the U.S. healthcare industry through the lens of economics.

Baker’s Hospital Review notes that the U.S. healthcare sector has not been relatively affected by inflation (so far). However, it is somewhat confusing because the price of healthcare has been rising for decades.

According to data from the US Department of Labor Bureau of Labor Statistics, medical inflation has risen 3-4 percent annually since 2010. Even in 2020, when healthcare access was severely curtailed due to Covid-19, medical inflation measured 4.11 percent. The same data reveals that annual medical inflation exceeds 8.6 percent Five times Since 1982. That’s nothing to say about U.S. health care spending, which accounts for about 20 percent of GDP and is expected to grow at about 5.5 percent per year over the next decade.

Despite passing countless regulations, politicians have made little progress in reducing healthcare costs. But their failure has been quite lucrative. Politicians and special interests benefit from the cost of U.S. health care when the American public receives the bill.

Public Choice Economics reminds us that political exchanges, such as between politicians and healthcare providers, result in centralized benefits, but spread costs. Politicians need funds and votes to be elected. The bureaucracy needs resources to maintain and expand their influence. Large healthcare providers are willing to exchange with both parties if they receive optimal treatment to maximize their profits.

Healthcare is full of examples of political exchanges that are personally beneficial but universally harmful. Pharmaceutical companies sometimes spend more on lobbying than on research and development. Health insurance providers receive substantial subsidies from the federal government through Medicaid and other state-run programs that have the greatest impact. Hospital networks establish government-assisted Certification of Needs (CON) legislation, which stifles competition. There is a well-established “rolling door” of employment between drug manufacturers and the Food and Drug Administration.

An important consequence of these measures is that healthcare markets have become more conducive to meeting the needs of politicians and special interest groups than patients. Because cronyism increases political influence and the influence of politically connected people, government officials and special interest groups have little incentive to change anything.

Similar incentive issues affect inflation policy. Politicians benefit from the reduction of interest rates on expansionary monetary policy and the easy availability of borrowed funds as it allows for greater public spending. Public sector spending, 30 percent of GDP, provides trillions of dollars to sustain the impact. Special interests in the financial industry also benefit from the expansionary policy and have a “revolving door” with the Federal Reserve banks. Central banks also benefit as the public sector expands.

Stimulus concerns do not always prevent necessary reforms. The Federal Reserve has previously raised interest rates to stem inflation. Some areas of health care have gone out of control. But historically, the problems they have helped create are far less than giving the government more authority to solve them. And greater government influence increases the demand for government favors, motivating special interests to devote more resources to protecting and maintaining them.

Raymond J. March


Raymond March is a faculty fellow at the NDSU Center for the Study of Public Choice and Private Enterprise (PCPE) and an assistant professor at the NDSU Department of Agribusiness and Applied Economics, and a contributor to Young Voices. His research has been published Southern Economic Journal, Public choice, Institutional Economics JournalAnd Research policy. He has published articles National interest, The Washington Times, Washington Examiner, Mountains, RealClearHealthAnd somewhere else.

Raymond is a research fellow at the Independent Institute and director of FDAReview.org, an educational research and communication project on the US Food and Drug Administration (FDA).

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