The Politics of Medical Inflation

This paper discusses the politics of anti-inflationary policy in the medical care sector. We first clarify the issue by distinguishing between four different conceptions commonly used when discussing medical inflation. We then present some of the standard solutions to these problems suggested by economists. In the main part of the paper, we analyze the response of the government. We show that the underlying causes for failure in the economic market are likely to exist in the political market as well. In particular, the public good aspect of anti-inflationary policy fails to provide a strong incentive for the consumers of medical care. In contrast, the providers have very powerful incentives in the political market because the benefits of governmental action in this sector greatly affect them. Providers exert great pressure to prevent government policies aimed at reducing medical care expenditures. We present evidence and theory to explicate which sets of circumstances are most conducive to governmental action. We show that the most effective anti-inflationary programs in medical financing are least likely to be implemented and that a dispersed, pluralistic financing structure reduces the government's incentive to curb inflation.