Question

why a dollar today is worth more than a dollar in the future. What does this have to do with health care costs? (250-300 words)

Answer 1

A dollar today is worth more than a dollar in future. In simplistic way we can say a dollar affording certain scares services today would not be able to afford same services in future against same dollar.

On a time scale the dollar depreciates against the scares commodities and services. Time decays the value of dollar.

Example: 1 Kg rice for $5 today will not be at $5 after 3 years down the line. Now, lets compare time value in terms of interest rate and investments. Say prevailing interest rate 10% for 1 year and say we are going to get $110 after one year then it worth ~ $100 today i.e. $110/ (1+10%) = $100

The health care services are evolving with new technologies. The healthcare services become costlier with passage of time.

A country planning healthcare budget does take time value estimations. Ignorance of time value factor would lead in bad budget hence; country’s budget would always capture time value factor.

An individual has to estimate future costs of healthcare and has to plan accordingly. Estimation of healthcare costs can’t be done in isolation of time value factor.

Reasons for increasing health care costs and growing importance of time value factor money:

1)      Increasing fees for consultancy by professionals serving healthcare industry

2)      Healthcare sector requires recurring investments for technology upgrades and research. When a sector doesn’t have free cash flows then the goods and services of that sector tend to become costlier (free cash flow means the cash surplus without further cash investment or capital investment)

3)      Research and development doesn’t always ensure 100% success of project hence, so capital investment may simply become worthless due to lower feasibility

Therefore, time value of money and its applicability becomes very important in healthcare industry. Healthcare cost generally keep increasing and budget planning has to performed in accordance with time value of the money.