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PRIVATE HOSPITAL REVIEW 2008

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Healthcare inflation down, but not out

01 April 2008

In Categories: Nursing

This annual review of medical and healthcare inflation begins with a look at the inflation rates for this particular set of goods and services within the Consumer Price Index, comparing it to the inflation rate of all items headline CPI inflation rate. After 35 years of higher average annual inflation rates than the main basket of consumer goods, the healthcare index has, during 2007, slipped below the rate of escalation of the CPI as a whole, as can be seen in the graph.

This is indeed a noteworthy development in terms of the relative rates of inflation of the two indices. A recent study by the author, used as evidence in a High Court case earlier this year, reveals that if one takes a position in time in any year between 1970 and 2005, there has been a zero historic probability of the premium of compound healthcare inflation being less than one percentage point above the compound rate of headline CPI inflation. Between 1.00 and 1.99%, the historic probability has been 13.9% of occurrences, while the range of 2.00 to 2.99 percentage points for the premium has been 16.7%. Then there is a substantial jump upwards in the probability distribution, with a margin of 3.00 to 3.99 percentage points having a probability of occurrence of 22.2%. The median premium value lies within this last band, at a level of 3.48 percentage points per annum. But the mode of the premium distribution is clearly in the 4.00 to 4.99 percentage points per annum band, which holds 44.4% of the historic sample.

What Has Driven Healthcare Inflation Downwards?

It would be most unexpected if government policy-makers did not claim the lion’s share of the credit for the decrease in the rate of healthcare inflation over recent times. Interventions such as those in pharmaceutical pricing and the blunting of collective bargaining practices, must certainly have contributed, but it is suspected that the generally low rates of inflation in the domestic economic environment between 2004 and mid-2006 played a strong moderating role, and set the scene for government interventions to play very hard. In particular, the ongoing strength of the Rand’s exchange rate against major currencies between January 2002 and April 2006, probably was also very instrumental in allowing controlled prices in the sector to remain as low as they have done, while contributing to the enabling broad decline in inflation.

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