Question

What economic factors contribute to the high cost of healthcare in the US? What are instances of economic failure that have contributed to this cost escalation? What should we do about them?

Answer 1

U.S. health care expenses stood at $3.5 trillion in 2017. That is making health care one of the largest industries in the world. This constitutes 17.9 percent of the domestic gross product. Health care, by contrast, cost $27.2 billion in 1960, just 5 per cent of GDP. That translates into an annual expense of $10,739 per person for health care in 2017 versus only $147 per person in 1960. Health care costs have risen faster than the median annual income.

U.S. health care expenses stood at $3.5 trillion in 2017. That is making health care one of the largest industries in the world. This constitutes 17.9 percent of the domestic gross product. Health care, by contrast, cost $27.2 billion in 1960, just 5 per cent of GDP. That translates into an annual expense of $10,739 per person for health care in 2017 versus only $147 per person in 1960. Health care costs have risen faster than the median annual income.

Third, there has been an rise in chronic diseases including diabetes and heart disease. As of 2010, the cost of health services for people with at least one chronic illness is responsible for more than 85% of health care spending. Nearly half of all Americans have at least one. They are costly and difficult to manage. As a result, 50 per cent of all health care costs are incurred by the sickest 5 per cent of the population. Just 3 percent of the nation's health care expenses are borne by the healthiest 50 percent. Most of these patients are Medicare patients.

The United States medical profession is doing a great job of saving lives. However it does come at a cost. In the last year of life, medicare spending on patients is six times that of the population. Treatment for these patients costs a fifth of Medicare's budget. Those patients go to the doctor's office about 25 times on average during their last six months of life. Half go into the emergency room during their last month of existence. Intensive care unit ends up one-third. One fifth undergo surgery.

Health care spending increased by an average of 6 per cent a year between 1993 and 2013. In the early 1990s health insurance providers sought to manage prices by once again increasing the use of HMOs. With the Balanced Budget Act in 1997 Congress then sought to regulate costs. It put other health-care providers out of business instead. For this reason, Congress relied on the 1999 Balanced Budget Refinement Act and the 2000 Benefits Enhancement and Safety Act to limit payments. The Act also extended coverage to children through the Children's Health Insurance Program.

One explanation is that the pharmaceutical firms have developed new prescription drug forms. They marketed directly to customers and generated supplementary demand. The number of drugs with sales above $1bn rose from six in 1997 to 52 in 2006. Even if they were not any better than conventional treatments, the U.S. government approved costly medications. Many developing countries were more cautious.

By 2009, the federal budget absorbed rising health-care costs. In 2008 the cost of Medicare and Medicaid was $671 billion. This was 19 per cent of the $3.5 trillion overall budget. Payroll taxes cover less than half of Medicare and none of Medicaid. This is because of the so-called mandatory budget that typically covers military and veteran benefits, healthcare, and debt interest. Congress knew something had to be done to rein in these costs.

The goal of Obamacare is to reduce those costs. First, insurance providers were forced to offer free preventive care. That addresses chronic diseases before they needed expensive emergency room services in hospitals. It also reduced fees to insurers for Medicare Benefit.