Real Prices fall where Consumers Spend their own Money which is why Health Care Prices have Soared

Posted by PITHOCRATES - December 23rd, 2012

Week in Review

A lot of us no doubt hear our elders talk about how cheap things used to be.  “When I was a kid you could buy a bottle of pop for a nickel.”  “When I started driving you could fill up the gas tank for a couple of dollars.”  “I remember when 99 cents would buy you two eggs, 4 sausage, a slice of ham, 4 rashers of bacon, hash browns, toast and a cup of coffee.”  And, yes, everything they said was true.  Things cost a lot less back then.  But our paychecks were a lot smaller back then, too.

When President Nixon decoupled the dollar from gold we started printing money.  And when we did we devalued the dollar.  Causing a sustained and permanent inflation.  This inflation caused prices to go up.  And our paychecks grew, too, to allow us to afford those higher prices.  So prices are relative.  They become more expensive when they rise greater than our paychecks.  They become less costly when our paychecks rise greater than prices.  There is a better way to look at how prices change over time.  Something that factors in the affect of inflation.  By looking at the number of hours worked required for a purchase (see The Cost of Health Care: 1958 vs. 2012 by Chris Conover posted 12/22/2012 on Forbes).

Mark Perry has posted some interesting comparison of how prices have plummeted between 1958 and 2012 when measured in terms of the hours of work required to purchase items. He concludes that today’s consumer working at the average wage of $19.19 would only have to work 26.6 hours (a little more than three days) to earn enough income ($511) to purchase a toaster, TV and iPod.  The equivalent products (in terms of their basic function, not their quality) would have required 4.64 weeks of work in 1958. In short, the “time cost” of these items has massively declined by 86% in less than 5 decades.

Similarly, Perry calculates that measured in the amount of time working at the average hourly wage to earn enough income to purchase a washer-dryer combination, the “time cost” of those two appliances together has fallen by 83%, from 181.8 hours in 1959 to only 31 hours today.

What if we applied this kind of analysis to health care? The results are quite interesting. In 1958, per capita health expenditures were $134. This may seem astonishingly small, but it actually includes everything, inclusive of care paid for by government or private health insurers. A worker earning the average wage in 1958 ($1.98) would have had to work 118 hours—nearly 15 days–to cover this expense. By 2012, per capita health spending had climbed to $8,953. At the average wage, a typical worker would have to work 467 hours—about 58 days.

In short, while time prices for other goods and services had shrunk to less than one quarter of their 1958 levels, time prices for health care had more than quadrupled…!

This simple comparison reminds us of three basic truths. In general, private markets tend to produce steadily lower prices in real terms (e.g., in worker time costs) and steadily rising quality. This is exactly what we observe for goods such as toasters, TVs, iPods, washers and dryers. In contrast, while the quality of health care unequivocably has risen since 1958, real spending on health care has climbed dramatically. This isn’t an apples-to-apples comparison insofar as the bundle of goods and services that constitute health care is also much larger today than in 1958. In contrast, even though the quality may be better, a washing machine in 2012 is still a washing machine.[2] If we were willing to rely more on markets in medicine, we might be able to harness the superior ability of Americans to find good value for the money to produce results more similar to other goods.

So why are health care prices soaring in real prices when everything else is falling?  In a word, waste.  Where consumers spend their own money real prices have fallen.  Where consumers receive benefits other people pay for real prices have soared.  Where there are market forces (i.e., competition) prices fall and quality goes up.  Because manufacturers have to get consumers who are looking for the best value for the money to buy from them.  Where there are no market forces because someone else is paying for your benefits (single payer, third-party, insurance, government, etc.) people don’t look for the best value for the money.  They just look to get the most someone else will pay for.  So there is no incentive to reduce costs or find cheaper ways to deliver higher quality.  Like in the private sector.

Obamacare won’t improve this.  In fact, adding vast layers of bureaucracy will only add waste.  And increase prices further.  With all that money feeding into the new Obamacare bureaucracy there will be less available for health care services.  Resulting in longer wait times, service rationing and service denials.  Health care may be free one day to patients.  But the cost of that free health care will soar even higher for the taxpayers who will have to pay for all of that bureaucratic waste.

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