: Journal of Economics and Finance • Volume 2.^ • Number.^ • Fall 1999 • Pages 193-198 A Note on Health Care Inflation Vsha Nair Reichert and Richard J. Cebula* Abstract A key issue in health care reform is the need to contain the inflation rate of the CPI for health care services without substantially reducing the quality of health care. Althougbt the previous literature has widely debated the causes of increasing inflation in the CPI for health care ser- vices, very little has been done to empirically test these arguments. We use an econometric framework that allows us to expressly examine the determinants of the inflation rate of the CPI for health care services. The data cover the period from 1960-1994. The main results provide empiri- cal verification for many of the demand-side and supply-side theories of the inflation rate of the CPI for health care services that have been widely discussed in the literature. UEL 11 ) The Issue Two basic concerns in health care reform are the need to increase access to services and to contain the percentage rate of change (inflation rate) of the consumer price index for health care services (hereafter. IRHC) without substantially reducing the quality of health care. Because of the rapid rate of increase in the IRHC over the last quarter century, a large numher of schemes to control IRHC have been proposed. However, it is difficult to evaluate the relative merits of these policy proposals without a concrete under- standing of the factors underlying the rising IRHC. Accordingly, it seems worthwhik to re-examine the fac- tors that may have contributed to the trend of IRHC in recent years. The contribution of this paper is entirely empirical. Unlike most previous studies, we use am econo- metric framework that allows us to examine the determinants of the IRHC. The study period nins ftmn 1969 through 1994. Our main results provide empirical verification for many of the dem^id-side and supply-side theories of health care cost determination that have been widely discussed in the literature. We find that the percentage of population over age 65 and the percentage of population covered by Medicare have a signif- icant, positive impact on the IRHC. The previous discussions .in the titetratme on real malpractice nnedkaJ premiums are inconclusive; by contrast, our analysis indicates that real average malprartice medica] premí- ums have contributed to the pattern of the IRHC. Improvements in medical technology pmitiveif impact the IRHC, while the increase in the number of physicians per 100,000 people exercises a negative impiaci oío tilie IRHC over time- Tlhie study proceeds as follows. The next section discusses the trends in health care expendituress in the U.S., which is followed by a brief review of the previotis literature on healtJii care costs.. Mext, we «fescrite * Usto ftór Rdíte«,, Úem0» imtítme ef T«chw0llegy„ Alteo CáOe^ sf Mam^emem,. 225 f t o * Aiiwiiius N 3O332-»II5, «#i*«air®«Bm.|aiiedmll«.., and Ríamá 3 Celtailla, Depsifímem. of Böswifliosks, Ammrm^ Mmáx: Sme ^; Satmrnlb, Gsmpa. 3Uí% e^iaMm!mU.ammrmg.£ám.. We mmU lite (© Itoník Ttsm Uádmt fmr ipfflCiam^' ríwipwínpf siemsli mr- sioDis « r u t e «itii(iiim£iní||sit.