As the P-I (among others) reported last week, the Washington state budget is in trouble.  And one of the biggest problems for the state is the rapid rise in medical costs, many of which are borne by the state.

By now, it should be no surprise that health care costs are rising faster than inflation; but it may be a surprise how dramatic the change has been over time. 

Since 1980, inflation has grown at about 3.5 percent per year in the Seattle and Portland areas.  But medical expenses have grown by nearly 6 percent per year.  Year to year, that’s not a huge difference; but over time it really adds up, as the graph below shows.  On average, things are about 2.5 times as expensive now as they were in 1980; medical costs, however, are about 4 times what they were 25 years ago.

The big question in my mind is:  why?  Why, exactly, is the cost of medical care rising so much faster than everything else?

  • Pundits and analysts of all political stripes seem to have their pet theories about what’s driving medical inflation: malpractice suits (nope—malpractice payouts are a trivial part of overall health care spending, and they’re rising at the same pace as medical inflation overall); greedy HMOs (probably not – during the mid-1990s, they probably helped keep medical inflation in check); inefficiencies in the health care system (possibly so, since the U.S. has far more overhead than other nations; but it’s hard to believe that the system has gotten radically less efficient since 1980).  And so on, and on, and on—it seems that every time I turn around, somebody has found someone new to pin the blame on.

    But the explanations I’ve always found most compelling are structural or systemic—that is, there’s no actual villain, just a confluence of trends and forces that have raised the demand for health care far faster than our demand for most other things. 

    For example, one thing that may be driving up demand is simple affluence:  As we’ve grown wealthier as a society, we’ve collectively decided that one of the things we want to do with our money is buy more and better health care. There’s no villain there, just an unexpected byproduct of a trend that, in the abstract, is something most people are quite pleased about.

    And for another example, as people get older they tend to use more, and more expensive, medical care.   And improving lifespans are meaning that more of us are elderly—which, by itself, could be pushing up total demand for medical care.

    At least, that’s what I thought.  But then I took a look at actual population trends in the Northwest states:  surprisingly, the share of the Northwest State’s population above the age of 65 actually declined for much of the 1990s, probably as rapid inmigration brought mostly young people to the region.  Only in the past few years has that trend reversed course.  (The graph shows Washington vs. BC –which really has seen an increase in its share of seniors.  But Washington’s trends seem to be similar to Oregon’s and Idaho’s).


    So I guess that’s one theory crossed off the list.  But if anyone out there can point me in the direction of particularly compelling research about why health care costs are rising so fast, I’d love to see it.