Wikinvest Wire

Open Enrollment and the CPI - Part One

Friday, November 11, 2005

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?


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.


Anonymous said...

Inflation? Yeah... just a little. I am self-employed and thus pay my own health insurance. For a single male, just turned 40, my premium went up 41% this year. Policy is through Kaiser.

I have little choice but to pay it.

Anonymous said...

As so much of this is medicare, is government reimbursement holding it down? Not due to the 14% premium increase anyway. I guess it is because it doesn't go up at all for those that don't have it. I hear the next step will be to designate it an investment so it doesn't have to be counted at all. Soon will we have to designate energy consumption an investment in work and we won't have to measure it at all.

Anonymous said...

What a load of crap! Four percent? What planet do they live on?

Anonymous said...

I've always felt insurance companies understand inflation better than most everyone else. By necessity, they are experts in calculating and forecasting replacement cost. Buffet probably owes most of his wealth to his background in the insurance business. Does anyone know of real inflation estimates published by insurance companies? They must meet and discuss it somewhere.

Anonymous said...

Maybe they "hedonically adjust" the medical costs downward to account for improvements in quality, as they do for electronics, etc.

Anonymous said...

Nice post Tim.

Just some anecdotal evidence from my experience with healthcare premiums. When I started my current job in 1997 I chose the costliest option that my employer offered for a healthcare plan - as a single person, $37 a month. This year that same option rises to.......$138 a month for a single person. That's a 272% percent increase. During that same time my salary has increased 95%. Considering the other increases during that time, notably housing and energy costs, not to mention the copay increases and one can see how the average American (read middle class) is getting squeezed.

Worker 17 said...

I don't want to sound cynical, but isn't the size of many payments made by the government through social programs and TIPS bonds calculated using the CPI? There is a financial incentive there to understate the massive increases in health costs.

Anonymous said...

Here is how inflation becomes Not-Inflation.
Suppose your medical plan did not cover Viagra or stomach stapling for the obese folks.
Then both these became "covered" expenses. Both being quite popular lots of folks in your medical plan use one or the other or both.
Certainly these are not cheap.
Certainly they will contribute to a rise in costs for the plan as a whole.
BUT they are not inflation. They are a new benefit a new service to you.
Now if Viagra cost $50 for a month when first added to the plan and the next year, due to competition from Cialis, the price is $40 for a month that is actually DEflation.

Same thing with a TV. If I go buy a small color TV (say 15 inch) and 3 years later I buy another for $30 higher price BUT the new one has a remote control, is cable-ready and includes a DVD or VHS player did the price go up or down?

ANSWER: probably DOWN even though it cost $30 more.

Inflation has to be the cost of the SAME item or service. meaasured over time.

I suppose you could argue that I wanted to buy an ENTRY LEVEL TV and the cheapest 3 years ago and the cheapest today were $30 different AND therefor that is inflation. I do not know how they deal with that when they calculate inflation.


Anonymous said...

Re: TIPS and CPI

They are all part of the fraud/cancer that is central pranking. It wasn't so long ago that people believed in such a thing as rule by divine right.

Tim said...

The topic of quality adjustments is very complex - the New York times did some investigation into that a while back and wrote a great article about one particular case (a car?) - I couldn't find that link - if anyone knows of it I'd like to read it again.

Here's an article from Antony Mueller over at Mises about how quality adjustments for consumer goods benefit other economic statistics.

"Applying the hedonic technique to a host of goods and services means that even when prices were generally rising, but product improvement are deemed to be larger than the price increases, the calculated inflation rate will fall. With a lower inflation rate, the transformation of nominal gross domestic product (GDP) into real GDP will render a higher result. Likewise, given a constant labor input, productivity will increase. Hedonics opens the door to producing magical results: a lower inflation rate with generally rising prices, a higher growth rate although the economy may be weaker, and a higher productivity number, although productivity would have been declining without the hedonic imputations."

Anonymous said...

One could argue that currency holders are entitled to any productivity gains that result. For example, if technology enables cheaper, better food for a lower price, then that is your right. Instead, what we are getting is comparable food at a higher price. Where is the difference between these two going? Follow the money. Who benefits by lending out capital they do not have and then collecting interest on it?

There is nothing scary about deflation. I'd love for less of my pay check to go for food, housing and other essentials. I'd have more with which to do other things. As Faber points out, it is only bad for those with a lot of debt.

john_law_the_II said...

yeah, faber had an excellent piece this month.

Anonymous said...

You now have another fan.

Anonymous said...

I don't understand what all you people are griping about.

Look, on Remulack, we don't need health insurance because we never get sick, hence the Kohnheads don't include heath care in the CPI.

And, hedonic-shmeedonic. Every body knows that the best way to get around price controls, back in the bad old days before the fed did away with inflation, was to come out with a "new and improved" product and raise the price.

What I want to know is what inflation statistic the Kohnheads are going to use when the Bernanke Figurehead-Unit starts his inflation targeting.

Please answer that one for me, Tim.

Hopefully it will be one that's easy to move up and down every month. Isn't there some rule about how you can control the fed funds rate or the money supply, but not both? Well, it turns out you can target the inflation statistics, or price increases, but not both.

Anonymous said...

I recently fell into the "or if you get sick" category for the first time in several years, making health care more like pumping gas for me. The inflation that occurred over those years was shocking. The 3 medicines they put me on cost $60/month with the insurance (They'd cost almost $400 without it). I still haven't gotten the bills for the urgent care, the tests they ordered or the specialist. And there will be bills. The insurance never covers anything completely.

Anonymous said...

Compare the US system to the situation in france. The french health system costs much less per person that in the US, yet the World Health Organisation says that France has the best health care in the world. More info here :

Tim said...

Good question on the inflation targeting ... the more I look into the inflation data, the more it becomes obvious that you can make it come out to anything you want it to.

Anonymous said...

Thanks for the blog, I read it every day.

I've got a question, recently the Fed announced that it would stop publising stats on M3. Why on earth would they do this... I'm no economist so please go easy on men but are they tring to hide what they will need to do in future if the dollar falls?

"On March 23, 2006, the Board of Governors of the Federal Reserve System will cease publication of the M3 monetary aggregate. The Board will also cease publishing the following components: large-denomination time deposits, repurchase agreements (RPs), and Eurodollars. The Board will continue to publish institutional money market mutual funds as a memorandum item in this release.

Measures of large-denomination time deposits will continue to be published by the Board in the Flow of Funds Accounts (Z.1 release) on a quarterly basis and in the H.8 release on a weekly basis (for commercial banks)."

Tim said...

I think Elroy Jetson over at Silicon Investor sums it up well:

"When the Fed discontinues a reporting series, it always precedes activity which wouldn't withstand public scrutiny."

Tim said...

More from Elroy today:



No M3 means they will monitize the debt.


Monetizing the debt cannot be hidden in M3, it would show up all the way down in M0. M3 is a pretty useless number, the Fed can't do much to influence it anyway, so its little more than busywork.

They've got more important things to deal with.


Utter nonsense. When the Fed bails Fannie Mae out with a $1 trillion interest rate swap, that will show up in M3 but not M2, M1 or MZM.

All of the container loads of new $100 bills the U.S. is spending in Iraq will show up in M3 as soon as they are deposited in a foreign bank - but will not show up in MZM, M1, or M2 unless the money comes back to our domestic economy. Perhaps you should wonder why even U.S. based contractors are being paid with suitcases of $100 bills, when they would prefer the payments be made by direct deposit to their U.S. account.


new $100 bills

That's M0.

You're completely out to lunch on this.


Let's review. New $100 bills inside the United States are counted in MZM.

New $100 bills outside of the United States in Iraq are not counted - until they are deposited into a foreign bank, then they become M3. If the money is repatriated, they become MZM as you assume.

There is a reason why the U.S. military is paying contractors, even U.S. contractors, in Iraq with suitcases of $100 bills rather than direct deposits to their U.S. accounts as they wish. Until you can explain why this is happening, you don't understand how our money system works.


New $100 bills outside of the United States in Iraq are not counted...

There are no bills printed outside the United States.


So in other words, you don't understand and can't explain it.

You incorrectly assume that currency gets included in the MZM total as soon as its printed - it does not.

In other words, you believe all of the reserve cash in Federal Reserve and Treasury vaults is part of MZM -- but this is not true until it is shipped to a bank.

Currency is only included in money supply total when it enters circulation. This particular currency is entering circulation in Iraq. That is not even money until it becomes M3 in a foreign bank. Then becomes MZM when repatriated back to the United States.


There's nothing to explain. No bills are printed in Iraq: never were, never will be. If you have a photo of an Iraqi branch of the US Mint, feel free to post it, otherwise you're just blowing smoke.

The reason cash is preferred to direct deposit for many transactions is for the simple fact that the country is a smoldering hole and the banking system is in a state of complete disrepair and had minimal means of dealing with the outside world for the past 3 decades. This should be obvious to anyone who has seen a newscast in the past 2 years. If you missed those, then I imagine you also missed the images of C-130s flying in with pallet-loads of US bills. Those bills were counted in the aggregates the moment they got shipped out the Mint's warehouse.

Large transactions are done the way they have been done for decades: electronically, outside the country.

Come back if you ever find some evidence. Until then, this is the same kind of bullcrap theory as the JPM gold carry trade BS of a couple years back.


Do some more study and you will discover that currency is not money as soon as it is printed.

Reserve currency in Treasury and Federal Reserve vaults is not money either.

Currency is only counted as money when it enters circulation -- normally when it gets shipped to a bank, but there are exceptions, like Iraq.

New U.S. currency shipped from the Fed to the Central Bank of Japan is counted in M3, not MZM. You incorrectly assume this would be MZM.

Your incorrect assumptions are leading you to an endless list of incorrect conclusions.


Ok, mate. It's not purpose in life to go around deflating other people's fantasies.



Once you learn more about how and when currency is counted as part of the money supply, a great number of "mysterious" things will become clear to you.

They're not mysterious, its just a magic trick - simple misdirection.

Currency is not money as soon as it is printed. Currency is money only when it enters circulation.


Sure, thanks for the tips. EOM.


Please instruct us on your alternate reality where currency becomes money before it enters circulation.

In your fantasy, does currency become money:

as soon as the ink gets pressed onto the paper;
or only after the ink is dry;
or only after the sheet is cut into individual bills;
or only after the money leaves the mint?

Here's a stumper for you. You can purchase sheets of $1 bills which are not yet cut into individual bills - yet the bills in this uncut sheet are included in MZM. How is that possible?

Or maybe, just maybe, currency only become money once it enters circulation. Ding! Ding! Ding! Correct answer


How many dead horses do you beat at one time?



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