Riding the Health Care Cost Rocket

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When I read informed opinion on health care costs going up or going down, I visualize the scenes in the Exorcist (Linda Blair’s head rotating a complete 360 degrees or her pea soup hurling). It really depends on what data set you pull, how you view the data in that data set, or if you are really looking for the truth (and not just trying to “prove” Obamacare is good or bad).

Going back to Professor Krugman’s now infamous statement:

The health exchanges are off to a famously rocky start, but many, though by no means all, of the cost-control measures have already kicked in. Has the curve been bent? The answer, amazingly, is yes. In fact, the slowdown in health costs has been dramatic.

If one is trying to convince you that health care costs are falling – the “go to” place is the health sector data in the Consumer Price Index.

Figure 1 – Change in Medical Care Costs – Index (blue line, left axis) and Year-over-Year Change (red line, right axis)

FRED Graph

Figure 1 “proves” that the rate of growth of medical care prices have been decelerating – although it also proves health care prices are still rising. One pundit, using the medical care components of the PPI and PCE, argued the opposite:

“Healthcare inflation has begun to accelerate,” wrote Deutsche Bank’s Joe LaVorgna pointing to the new producer price index numbers. “The price of “selected health care industries” rose +0.3% in January following gains of +0.2% in December and +0.3% in November.”

These numbers are likely to have an amplified effect when we get an updated reading on the PCE deflator, the preferred inflation measure of the Federal Reserve.

Figure 2 – Graph Accompanying above quote

I am at a loss why one would use change in price to argue that medical care costs are falling or rising. We are not talking about coffee here where the usage is relatively stable. The more procedures performed and the more pills popped – the more money will be spent on medical expenses. For medical expenditures, it does not matter that the costs for a particular pill or procedure are inflating slower or faster – as medical expenditures are more sensitive to the NUMBER of procedures performed or pills popped.

Figure 3 – Indexed Health Care Expenditures (blue line) vs Indexed Personal Income (red line)

FRED Graph

In the 21st century – health care expenditures for Joe and Jane Sixpack have been taking more and more of their income. It just keeps growing at about the same rate. Unfortunately, income is not growing at the rate of medical expenditures.

Worse, Figure 3 is AVERAGE personal income (influenced heavily by the 0.1%). Here is the same data set for health care expenditures versus MEDIAN income.

Figure 4- Indexed Health Care Expenditures (red line) vs Indexed Personal MEDIAN Income (blue line)

Whether Obamacare eventually starts effecting the rise in medical expenditures or not, a crisis in medical expenditures is already underway. The root causes for the rise in consumer expenditures are yet to be addressed, and may be much more urgent than fixing the defects in Obamacare.

Other Economic News this Week:

The Econintersect Economic Index for March 2014 is showing a moderate growth deceleration. There are soft data points we watch outside of our index which bears watching. Nothing at this time is pointing to real economic contraction, but there is enough data sets in the warning track to let you know that the economy is far from running on all cylinders.

The ECRI WLI growth index value has been weakly in positive territory for over four months – but in a noticeable improvement trend. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

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Initial unemployment claims went from 336,000 (reported last week) to 348,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. The real gauge – the 4 week moving average – marginally worsened from 338,250 (reported last week as 338,500) to 338,250. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

Weekly Initial Unemployment Claims – 4 Week Average – Seasonally Adjusted – 2011 (red line), 2012 (green line), 2013 (blue line), 2014 (orange line)

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Bankruptcies this Week: Cayman Islands-based Suntech Power Holdings Co.

Weekly Economic Release Scorecard:

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