Inflation and Health Insurance.

by Joseph P. Newhouse

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The interrelationships between inflation in medical care and health insurance are reviewed. An increase in medical-care prices does not cause less insurance to be purchased, but increased medical insurance does cause prices to rise through two mechanisms: (1) Increased demand pressing against an inelastic supply raises the price of medical services as a one-time occurrence. (2) As insurance approaches completeness, the medical-care sector may continuously turn the terms of trade between it and the rest of society to its advantage. Thus the present trend toward full insurance coverage in an essentially unregulated fee-for-service system does not appear to be viable in the long run. Three approaches that promise to moderate inflation are discussed: (1) a plan with a deductible equal to 10 percent of family income, together with repeal of the tax incentives to supplement this plan; (2) encouragement of Health Maintenance Organizations; and (3) direct control of resource allocation by the public sector, together with full or nearly full coverage. 19 pp. Bibliog.

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