Many observers are hailing the dramatic slowdown in medical-care price hikes as a sign that market pressures are finally taming the health-care inflation monster. Since peaking at 9.7% in early 1991, medical-care inflation has fallen to a 4.4% annual rate in the past six months--its slowest pace in 20 years.
Economist Rosanne M. Cahn of CS First Boston is not impressed, however. She points out that medical-care inflation also slowed sharply in the early 1970s, when the Nixon Administration sought to tame inflation by imposing price controls. During that episode, health-care inflation decelerated faster and further than overall inflation. But once controls were dismantled, medical prices exploded again.
To Cahn, the moral of the story is that health-care providers are highly responsive to government pressure and heightened public scrutiny, but they are also prone to revert to their old ways once the pressure lets up. So, without explicit cost controls, or better still, the development of true competition, she warns that health-care inflation is likely to take off again after the public's attention is diverted.