Hospital Care inflation in the United States: prices adjustments in a disequilibrium econometric framework

Uncontrollable medical care expenditure inflation in excess of general price inflation in the United States has prompted the writing of this paper. It is argued that such a frustrating phenomenon is due to the existence of disequilibrium in the hospital market. This phenomenon can be verified only by modelling the market by disequilibrium methods. In this paper, a model of price adjustment in non-clearing market is presented and tested by using autoregressive techniques. It is found that excess demand for hospital care has been the source of disequilibrium for a large part of the period of the study, 1965–1984. It is observed then the key factor causing excess demand is low out-of-pocket expenditure for hospital care by patients due to third-party payments. Had the co-insurance rate been adjusted upward or co-payment patient rate not fallen, excess demand would have been eliminated. This study also finds that the response of providers and regulators to cost inflation through price control policy seems to be ineffective in bringing the market to a state of equilibrium.