Open Enrollment and the CPI - Part One

Many of the 160 million Americans covered by employee-sponsored health insurance are discovering first hand just how benign inflation is when it comes to medical care. It is open enrollment time, and eyebrows are being raised across the country as Human Resource representatives explain how medical costs continue to rise at the rate of 8, 10, or 12 percent per year for the sixth year in a row.

Insurance premiums, co-payments, deductibles, and prescription drug costs are all rising.

According to a Kaiser Family Foundation study on Health Insurance/Costs which was the subject of a USA Today article just a few months ago:

This year, the average annual premium for family coverage hit $10,880, with employers paying an average of 74% of that cost and workers paying the rest. Workers this year paid on average $2,713 toward family coverage, or $1,094 more than they paid five years ago, the survey found.

On a chart these price increases look even more alarming, especially when plotted against overall inflation and the change to worker's wages. Over the last five years, the average increase for health insurance premiums has been 12% per year!



Although the data from that period is a bit spotty, it does appear that 1996 was a magical year. This was the only year in the last seventeen when workers actually gained ground on ever-increasing medical care costs, as their wages increased at four percent while their insurance premiums rose by only one percent. Also note that overall inflation does not appear to be affected by rising insurance premium costs in any meaningful way.

Hmmm ...

In Addition to the Premiums

Just a few years ago, a prescription drug co-payment of $5 or $10 used to be standard - now it's more like $20 or $25. At a recent information session, someone asked, "Didn't that co-payment go from $15 to $20 last year? And, now it's going from $20 to $25?" To which the Human Resources representative sheepishly replied, "Yes".

Increases in deductibles are by far the most nefarious hikes because, when you look at an increase of say $300 to $1000, you think, "That won't affect me, because I'm healthy". Then when you do need medical care, you're out another $700 compared to the same illnes a year ago - but that's probably the least of your concerns because you really just want to be healthy again.

Not that many years ago, didn't the rest of the family get to ride along for free? Or for some token increase? Not any more - now the first, second, and third family members cost an equal amount to insure, while the fourth and subsequent family members can be covered at no additional charge.

Of course people shocked by price increases at open enrollment meetings really shouldn't complain - they have medical insurance through their employer who typically ponies up 75 percent of the premium. If you are on your own, you are responsible for the full amount, and hence the full amount of the price increases.

For example, if a family's insurance premium was $10,000 last year and has now increased to $11,000, when an employer is there to help out, the employee experiences an annual price increase of only a few hundred dollars. If you are on your own, you now have $1000 in new expenses for the new year.

Now the Good News

Rising medical care costs, as experienced by hundreds of millions of Americans, are not showing up in any meaningful way in the government's inflation statistics.

Yes, that's right.

According to the CPI, the increases to medical care costs are fairly benign.

However it is that the Bureau of Labor Statistics calculates these price increase, their numbers come out much lower than the price increase that people actually pay. Should anyone be surprised? This table shows the year-over-year price increases for all medical care categories in the Consumer Price Index.



First, notice the conspicuous absence of double-digit numbers.

Next, notice that as measured by the Department of Labor, total medical care cost increases are only four percent - significantly lower than the increases that people are actually paying for health insurance, which seems to have curiously disappeared as a separate category within the CPI a few years back.

Are the insurance companies pocketing the extra eight percent difference each year between the rise in medical care costs and the rise in what people pay in insurance premiums?

Dunno.

Most people have their health insurance costs deducted from their paycheck (before taxes in many cases) - it's not like pumping gas where you see prices change every time you fill up your tank. This is a one-time surprise every November, then come January you get used to the new take home amount on your paycheck, and you live with it for the rest of the year.

This brings to mind Federal Reserve Chairman Alan Greenspan's answer to a recent question before Congress:

The reason people are seeing, think they're seeing, prices rising is that they are. They're seeing them, however, for a lot of petroleum related products. The one statistic that everyone is able to audit is the price of gasoline. It's a homogeneous product and it's listed up there on the signs at service stations all the time, and that needless to say has been fluctuating all over the place. But, the Bureau of Labor Statistics does an excellent job in trying to truly get what is the structure of price change in this country, and those data from the BLS, are as best as we can do.

So I think that it's mainly a selective view ... what people often see in a period like this. But when you look at all of the data, it doesn't show the concern of acceleration, that I often hear as you do.

So, a couple of points here about what is a masterfully constructed answer to the very fair question of why everything costs so much, as originally appearing in this post from last week.

1. People see changes to gas prices, but generally aren't aware of rising health care costs except for once a year at open enrollment or if they get sick. To this extent, it is accurate, but disingenuous to conclude that people don't "see" this non-petroleum related price increase - they pay it, but they don't really "see" it, certainly not in the CPI.
   
   
2. There needn't be concern for "acceleration" in medical care price increases because the medical care price changes experienced by people in this country are not "accelerating" - the price increases have been fairly constant at between 10 or 12 percent per year for the last half decade. Going up rapidly at a steady pace, but technically not "accelerating".
   

This evasiveness and precise selection of words is something that Mr. Bernanke is really going to have to develop quickly - what Mr. Greenspan has said here is all technically correct, but also technically very misleading and very disingenuous - surely, just part of the job.

To be continued ...

Part two is now available here.