The first monthly decline in medical prices in 35 years!

Investors who watch the traditional financial media shows can be forgiven for not hearing about an amazing statistic that came out of this morning's monthly consumer price index release from the Bureau of Labor and Statistics, because it isn't getting much coverage.

The CPI was up in July, after showing declines for the previous three months. However, looking at the fine print, we see that prices for medical care declined in July by 0.2%. As economist Brian Wesbury points out, this is the first decline for the measure of the cost of medical care in any month for the past 35 years!

The previous month, the medical cost inflation reading was zero.

What's going on here?

It's hard to know for sure, but it could be that participants in the free enterprise system in the United States are attempting to address the need for medical care outside of traditional channels, and that this competition is actually causing a decrease in prices. For example, economist Mark Perry recently highlighted this article entitled "Dr. Wal-Mart" in his excellent Carpe Diem blog, illustrating the impact that Wal-mart's entry into the world of filling prescriptions has had on the cost of prescription drugs*.

The article cites a physician in Columbus, Ohio who says: "Because of their big role in the marketplace, they couldn't be ignored. And it really has affected the way I prescribe medication. That is true, and I'm not alone."

Elsewhere in the article Ron Galloway, a national speaker who specializes in giving talks on the impact of Wal-Mart on the US health system pinpoints what he believes is the cause of this demand for "outside the system" medical solutions: "Obamacare is going to have people looking for getting primary care in other places than hospitals. And Wal-Mart, they can ramp up quickly."

Competition, due to free enterprise, tends to drive prices down wherever government interference does not artificially prop them up. This has been the case in most areas of technology for example (think about the price for DVD players and e-readers), but not for medical care.

Back in July of last year, we pointed to LASIK eye surgery as an example of a procedure that is not covered by Medicare and has seen its prices drop rapidly over the years, as opposed to procedures such as MRIs, where government regulates reimbursement and where prices have not gone down at all over the same period.

While those who believe in central planning think that the government can simply mandate that prices be lower, it is free enterprise and competition that brings prices down, not government mandates. The government's attempt to mandate a 21% reduction in Medicare reimbursement for doctors, initially decreed last year, has been postponed by Congress several times at the last minute (it is currently postponed through November of this year).

If physicians cannot charge enough to make administering care worth their while, very few of them can afford to operate at a loss for all Medicare recipients, and will simply refuse to take patients on Medicare. Cecil B. Wilson, MD, the head of the American Medical Association, says that one in five physicians already limit the number of Medicare patients they will treat, and one in four Medicare patients searching for a new primary care physician are currently unable to find one, due to the fact that physicians cannot run charities at their own expense, regardless of lawmakers who think they can reduce prices by congressional fiat.

However, the free enterprise system motivates people and businesses to look for ways to fill unmet needs, which is exactly what Wal-Mart and other businesses are doing in the face of a "halfway private and halfway public" healthcare system that we have discussed at length in other posts.

We choose to interpret the unprecedented drop in medical costs (at least unprecedented for the last 35 years) as a sign of the often-underestimated strength of the free enterprise system.

In fact, we hope that today's CPI data illustrate that it is already working its magic in the healthcare industry.

* The principals of Taylor Frigon Capital Management do not own securities issued by Wal-Mart (WMT).

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