How to figure the cost of a medical procedure in the future when adjusting for inflation?
Question Details: My son broke a tooth in a place of business. Their insurance covered the immediate, temporary repair. His dentist stated that the repair may break off and that a permanent solution is a crown or veneer however he has to wait until he's an adult to have this done. The insurance says they will only cover medical payments up to 3 years, he won't be an adult for another 9 years. They are open to paying us for this future procedure now. How can I fairly and properly figure an adjusted amount of what a dental procedure will cost 9 yrs in the future? Thank you for your help, Mark
Theortically, you could look up and provide documentation as to the average general rate of inflation over the last, say, 10 years, or else if you can find it), information about the average rate in dental costs over the last 10 years, then use that information to calculate the procedure's likely future cost (the more specific information would be better): so, say it's $1,000 today and inflation is 3% per year average: so next year it would cost 1,000 x1.03 = $1,030; the year after, $1,030 x 1.03, or $1,060.90; etc.
But then, you have to "reduce to present value": the law (and accounting practice) holds that money today is more valuable then money tomorrow, since if you get it today, you can invest it. So you should then take the number you find per the above and do a reverse operation with it, using the average rate of return on a safe investment, like CDs.
It's better to just forget about all the above and use today's cost, as I'll show now.
Using compouned inflation, the cost of a $1,000 procedure 9 years from now could be projected to be (using our hypothetical 3% inflation rate) $1,343.91. But if you use, say, a 1.5% discount rate, based on some 9 or 10 year investment, that $1,343.91 in 9 years is equal to $1,172.99 today--or $172.99 more that the original $1,000. But to get that $172.99, you could do a lot of resarch and arguing, about what inflation and what discount rates to use. The closer the rates, the less the difference--and if the discount rate is higher than the inflation rate, you'd come out behind (which is why setting those rates is critical and could be contentious). It's probably easier to just ask for the current cost, given the effort that could be expened for a slight gain at a time when inflation is very low.