The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

Impact of Inflation

Posted by Alan on February 17, 2007

Medical costs drive health insurance premiums. That’s pretty obvious to folks when they think about it, but few actually think about — especially pundits and politicians with a point to make. Instead they look at health insurance company profits, administrative costs, etc. and conclude that carriers set the premiums according to some voodoo-driven formula that is completely disconnected from the cost of care.

As a result, when carriers come out with low premium, high out-of-pocket plans they are routinely condemned by, well, pundits and politicians. Then Insurance Commissioner, now Lt. Governor John Garamendi is known to connect high-deductible HSA plans with the fall of Western Civilization.

 So it was kind of fun to come across a nifty tool on the Internet called Tom’s Inflation Calculator that, not surprisingly, calculates the impact of inflation over time. There are several such calculators online, but what makes this one nifty is that it has the option to calculate the impact of U.S. Wage Inflation and, most significantly, U.S. Medical Cost Inflation.

This leads to some interesting results. Remember back in, say, 1980, when it wasn’t uncommon to have a health plan with a $250 deductible and $1,000 co-insurance? There were richer plans and a lot were sold with higher deductibles. Want to know what the equivalent $1,200 out-of-pocket would be in 2007?

  • Based on Retail Price Inflation:    $3,312
  • Based on Wage Inflation:            $3,212
  • Based on Medical Cost Inflation:  $5,960 

There’s a few conclusions you can make from this. One is that an HSA with a $3,500 annual out-of-pocket maximum doesn’t seem like such a bad deal after all. Another is that if the pundits and politicians really want to bring down the cost of health care, they need to deal with the cost of medical care. Of course, that’s a lot harder. So while I’m betting many of you will check out Tom’s inflation calculator, I’m willing to bet not many of them will.


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