Rising healthcare costs in the US

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Marie Kamara

Tableof Contents

Introduction 3

The US healthcare industry 3

Health insurance 4

Healthcare spending facts 5

Health insurance 6

Effects of limited access to healthcare for the uninsured 6

Factors that prevent acquisition of health insurance 7

Economic importance of health insurance 8

Economic explanation for the rising healthcare cost 9

Demand Factors 9

Supply Factors 11

Elasticity Factors 13

Implications of the rising health care costs 14

Employment and benefits cost 14

Entitlement spending crisis 15

National debts 16

Conclusion 16

References 17


The healthcaresector is one of the industries that provide consumers with essentialservices. Health services are needed by individuals. They are notlike others services that one purchases because they want, but theyhave to. Healthcare organizations offer products and services interms of diagnostics, healing rehabilitation and preventive programs.Healthcare industry is the largest in the US since it touches everycitizen. This paper focuses on the rising cost of health carespending, its economic implications, and health insurance.

TheUS healthcare industry

The averageannual revenue of the sector is $1.668 trillion. There are over784,000 companies and over 16 million employees in the health caresector. The industry is characterized by heavy investments bygovernment and private entities. A large percentage of healthcareorganizations are owned and managed by the private sector. Thegovernment owns and operates only 21% of the healthcare facilities.Non-profit and for-profit organizations own 58% and 21% of healthcarefacilities respectively.

The healthcaresector as a whole is all business like other industries. Hospitals,nursing homes, and specialized clinics are managed like for-profitorganizations. From a business point of view, healthcareorganizations today have the business focus of driving higherprofits. The business perspective of the industry is one of thereasons behind the rising cost of health services.

The majorstakeholders in the healthcare industry include consumers, employers,employees, government, insurance, research organizations,pharmaceuticals, and professional organizations. Consumers are themost important group of stakeholders for any organization. Consumersare provided with health care services if only they offer a means topay through means such as out-of-pocket, government sources andhealth insurance (Niles N. J., 2014). The increase in the consumerpopulation translates to increase in demand for services and productsthat will address consumer needs or wants. At a population growthrate of 0.7%, the demand for healthcare service is expected toincrease. Hospitals are the major employers. The governmentinfluences the sector significantly through regulation, funding, andinsurance. The access to health care services is determined by theability of a consumer to pay for they and insurance organizationsplay major in the payment process.


The US healthcaresystem does not provide healthcare access to all of its citizens.This phenomenon may be due to the high cost of health services andunderinsurance and uninsured population. Insurance caters for themedical expenses incurred by patients. According to the research bythe Center for Disease Control, CDC, there are 9.1% of individualswho are not insured. The percentage of uninsured US population hasbeen decreasing over the years due to the government regulations,especially the Affordable Care Act (ACA). The Obama government passedthe ACA with the aim of ensuring that all American citizens,irrespective of their race and financial status, can access medicalservices and are insured. The likelihood of Whites to have healthinsurance was highest (93.8%) followed by Blacks (90.1%). Hispanicsscored the highest (19.4%) in uninsured individuals. Adults were morelikely to be uninsured than children (CDC).

The majority ofthe US citizens have private insurance while others have soughtsocial insurance and social welfare programs financed by thegovernment. Social insurance programs include Medicare, Medicaid, andthe State Children’s Health Insurance programs. Public insuranceprograms provide coverage for seniors and the low-income families whomeet the requirements. In 2014, 36.5% of US population had governmenthealth insurance. Medicare provides coverage for the individuals withover 65 years and the disabled. Medicaid has provided the poor withthe opportunity to access medical services. The coverage provided bythe private insurance is mainly employer-sponsored. 66% of UScitizens had a private insurance plan in 2014. Most of the employersin the USA provide health insurance to their employees. The coverageby private insurance is better than the public option. It coversemployees and their dependents. Approximately 40% of the insuredindividuals directly purchased their insurance. Those with directlypurchased insurance are more likely to have other types of coverage(Smith J. &amp Medalia C., 2015).

Healthcarespending facts

The expendituresin the health industry have drastically increased over the decades.Catlin A. &amp Cowan C. (2015) profiles the health care spending ofthe US from 1960 to 2013 using the data from the National HealthExpenditure Accounts (NHEA). During the period, the health spendingshare of the GDP increased from 5.0% to 17.4%. The average annualgrowth in nominal national health expenditures surpassed the nominalGDP growth. The former was 9.2% while the latter was 6.7%. Between2012 and 2013, the nominal GDP rose by $605 billion while the healthspending increased by $102 billion. The addition $102 billionaccounted for 16.8% health marginal share of GDP in 2013. Employers,households, and private sector funded 77% of health spending in 1960,and the government financed the remaining. However, the governmentsponsorship increased to 43% in 2013.

The spending in2014 was $3 trillion, $9,523 per individual. The national healthspending increased by 2.9% and 5.3% in 2013 and 2014 respectively. Aprojected rise to 4.8 trillion USD would be the case by 2021. In2023, the spending is projected to be 17.2% of the GDP (Leck S.2015). Medicare spending increased 5.5% to $618.7 billion in 2014compared to the 3% in 2013. The Medicaid spending, which accountedfor 16% of the gross national health expenditures, rose by 11% in2014 compared to 5.9% in the previous year. The federal Medicaidspending grew by 18.4% in 2014. The private insurance spending roseby 4.4% and accounted for 33% of the national health spending in2014. The growth rate was faster than the one (1.6%) in 2013.Household spending also increased by 1.3% in 2014, but slower thanthe growth rate (2.1%) in 2013.


Health coverageassists a significant section of a population as far as medicalservices are concerned. More often than not, employers provide theiremployees with health insurance through their remuneration. Thelow-income individuals find it too expensive thus remain uncoveredunless the government intervenes. To people without a medical cover,accessing healthcare services is usually a tall order. This sectionputs insights on the problems of limited access to healthcare for theuninsured, why they fail to subscribe for medical cover and theeconomic importance of insurance across all ages.

Effectsof limited access to healthcare for the uninsured

Individualslacking medical cover often fail to follow prescriptions fully. Thisis because of the expectation of high bills for the treatment. Theyfail to buy drugs or go for subsequent checkups for positive diseaseor condition outcomes.

Those people whodo not have insurance cover cannot receive preventive care at thecorrect time. This different case for their counterparts with fullinsurance who are able to access care on conditions like diabetes,cancer screening, and hypertension. Such conditions are usuallyexpensive and require consistent attention preferably from one healthfacility. This is only possible for those with medical cover. Theuninsured succumbs to death due to lack of care from theseconditions. Preventable hospitalizations case is another problem inthe uninsured population. The worst case scenarios are those wherethey get hospitalized due to health problems that are avoidable. Theoutcome is massive deterioration in overall health.

Factorsthat prevent acquisition of health insurance

Low-income population lacks medical cover due to inadequate funds.Health insurance usually requires that people pay monthly or yearlyfor the service. This is expensive to people who are alreadystruggling to make ends meet in basic needs of life. Further, casesof the exorbitant premium rate by the administrators that are evenhigher than regular tax subsidies (Schwarcz D &amp Siegelman P.2015)

Most people who have insurance get it from their workplaces. However,other companies or institutions do not offer health coverage.Employees working in such institutions find it hard to incur expensesfor medical cover. In other cases, some insurance covers offerservices that may not be valued by the potential client.Additionally, other health insurance institutions provide irregularand inconsistent regulatory information for people with no insurancecover. Lack of that clear information on the availability,affordability, benefits, and risks in the health insurance schemesbars individuals from securing the covers.

Proximity to safety-net care providers a cheaper option compared tothe payment of health insurance covers. Government or private supportfor hospitals and clinics with safe-net services means that a sectionof the population receives averagely good medical care. Bothsafety-net care and community clinics are a complementary for thosewith no insurance.

Economicimportance of health insurance

Medical cover reduces the fiscal, financial burden on families.Paying for health services directly from the pocket is expensiveespecially for conditions that require long-term care to improve.Conditions such as cancer and diabetes require regular preventivecare implying high bills on patients. On the same not, lack ofinsurance means missing discounts on medical services. The fullhealth insurance covering all members of the family is less expensivethan seeking medical services for single family members (Leick S.(2015).

Similarly, health cover is an important boost to health and wealth.Insured individuals easily divert a good portion of their salary toother life investments. Catastrophic health cases are well covered aswell as common disease control. This is different to people with noinsurance that have to incur stressful scenarios in seeking treatmentin times of health calamities.

Health insurance offers economic stability. It leaves the individualfree to save for retirement, education investment for children, andan increased home security (Komisar H. 2012). While high medicalbills incurred by the uninsured individuals their burden pockets, theinsured enjoys a healthy financial life. What is more, high bills mayhinder them from getting loans from banks and leads to bankruptcy inworst cases.

A healthy population is economically productive. Companies withinsurance scheme for its employees retain and attract best workersand provide a good motivation. Absenteeism at work is minimized andthus, giving employees more time on their work desk hence a higherproduction. This, in turn, led to the improved payment of taxes hencehigh contribution to the national gross domestic product, GDP.

Economicexplanation for the rising healthcare costDemandFactors

The society’sdemand for healthcare arises from a combination of factors thataffect the desire of each person to have good health. It iseveryone’s wish to be healthy as it enables them to feel better andfunction at their preferred level of performance. With good health,individuals in the society engage in activities they love and bringthem personal satisfaction. According to Feldstein (2012), those whoplace a high value on the consumption and investment aspects ofhealthcare also have a huge demand for healthcare. Indeed, theincreased investment in healthcare experienced in the U.S over thelast couple of years has been accompanied by an increase in theconsumption and demand for healthcare services. Consequently, thishas led to an increase in healthcare expenditure and costs. Theincreasing need for healthcare services, out of pocket price and therole of health insurance are the primary demand factors contributingto the rising healthcare costs.

Just like everyother commodity, increased need for healthcare eventually leads to anincrease in healthcare spending. The need for healthcare isdetermined by a combination of other underlying factors, includingchanges in the health of a population, population size, agecomposition, environmental quality as well as educational attainment.Regarding changes in the health of the population, the increasedprevalence of certain types of diseases often leads to increaseddemand for related healthcare services, which consequently drive upthe cost. Rosseter (2014) reports that the increased incidences ofillnesses due to exposure to environmental and occupational hazardsas well as increased prevalence of non-communicable diseases due tolifestyle changes have led to a rise in demand for healthcareservices. The situation implies that a significant portion of theAmerican population suffers from one or more life-threateningdisorders, a factor that has continued to pile pressure on thecurrent healthcare system, thereby driving up health care costs.

The changes in theage composition of the American population have become more apparent,with the number of older individuals increasing at a faster rate thanthat of younger persons. Feldstein (2012) points out that theincrease in the population of the aged individuals has pushed up thedemand for healthcare services given the many healthcarecomplications that come along with aging. Regarding environmentalquality, there is credible evidence that supports the fact that themore the environment deteriorates, the higher the prevalence ofenvironment-related diseases. Illnesses created by poor air and waterquality require the attention of healthcare professionals, especiallywhen a huge section of the population is affected.

The population sizein the U.S has been steadily increasing over the past three decades,and this is attributed to the influx of immigrants. The increase inthe total number of people in the U.S has also been accompanied by anincrease in the demand for basic healthcare services. In a bid tomeet this demand, more investments in healthcare facilities,personnel and technologies have been made, a fact that has pushed upthe overall cost of healthcare. With the U.S population projected tohit 336 million people by 2020, the healthcare costs are alsoexpected to increase even further (Rosseter, 2014). Educationalattainment is another important factor influencing the demand forhealthcare services. Individuals who are more educated tend to bemore aware of the benefits of staying healthy. They adopt healthydaily activities, including frequent visits to their doctors forcheckups. Highly educated individuals also seek to have the highestquality of healthcare services, which requires well-trainedprofessionals and state of the art equipment that come at a highcost.

Feldstein (2012)posits that according to the law of demand, a person’s quantitydemand of healthcare increases with a lower out-of-pocket price. Hereiterates that the extent of which health insurance covers medicalservices is the single most important determinant of out-of-pocketprice. Healthcare coverage through the Medicare and Medicaid programshas significantly reduced the out-of-pocket prices of most healthcareservices. Consequently, this has led to greater demand for theservices, pushing up the overall healthcare costs.


From a microeconomictheory perspective, supply factors play an influential role indetermining the cost of a good or service. When the supply of acommodity is lower than its market demand, then the commodity becomesmore costly. The key factors determining the supply of healthcareservices that have contributed to the rising healthcare costs in theU.S include the price of medical inputs, medical technology as wellas the internal organization of healthcare institutions.

The price of medicalinputs is determined by several underlying factors, including theprice paid for medical supplies, the price of owning capitalequipment as well as the level of wages paid to medicalpractitioners. Feldstein (2012) argues that taking the productivityof medical inputs to be constant, a higher price of the inputs wouldautomatically translate into a limited supply of healthcare services.Consequently, the limited supply increases the price of healthcareservices due to the price inelastic nature of healthcare demand. Thenumber of healthcare practitioners can also be viewed as part of themedical inputs. Over the years, the U.S has been experiencing ashortage of medical practitioners such as nurses and doctors. Cooper(2015, p.314) points out that the country is facing a severe shortageof doctors, with the shortage expected to hit the 137,000 mark in thenext fifteen years. The Association of American Medical Colleges(2016) reports that the shortage in medical practitioners over thecoming years will be in four main areas, namely primary care,surgical specialists, medical specialists and other specialists. Thesituation implies that the available specialists will be underincreased pressure to deal with a relatively large number ofpatients, a fact that will limit the supply of the specialistservices, thereby pushing up the healthcare costs even further.

Industrializednations such as the U.S are increasingly adopting cost-enhancingtechnologies and medical techniques such as organ transplantation,computed tomography scans, and magnetic resonance imaging. Thetechnologies have played a central role in enhancing the quality ofhealthcare services, but have also come at a higher cost. Feldstein(2012) argues that in the medical field, the new technologies tend tocompliment as opposed to replacing old technologies. He furtherpoints out that as much as the new technologies have facilitated thesaving of many lives, the costs of treating various diseases tends torise with the utilization of the said technologies. Most of the newertechnologies are costly to acquire and maintain, meaning thatpatients have to pay more. According to him, the new technologieshave created a moral hazard problem in which medical supplierswillingly avail the in-demand technological advances with the mainaim of reaping huge profits as opposed to saving lives. Consequently,the increased demand for insurance coverage to pay for the newinterventions leads to higher health care expenditures and costs.

Another importantdeterminant of the healthcare cost is the internal structure of theorganizations providing healthcare services. The organizations havevarying internal structures depending on their scope, scale as wellas ownership. Regarding scope, some healthcare facilities specializein the delivery of very few medical services while others offer awide range of services. Those offering a wide range of servicesrequire more specialists and often have a huge number of patients todeal with, a factor that makes them incur higher costs compared tospecialized facilities. Regarding ownership, the absence or presenceof property rights has a direct impact on economic incentives.Healthcare organizations in the U.S are either not-for-profit,for-profit or public. The different healthcare institutions behavedifferently concerning output, pricing as well as charitabledecisions. According to Feldstein (2012), public and not-for-profithealthcare organizations are under little pressure to minimize thecosts of delivering services compared to for-profit entities. Most ofthe for-profit entities are privately owned, meaning that the rise inthe cost of healthcare can be attributed to the increase in thenumber of privately held for-profit healthcare organizations.


They refer to thefactors that determine the manner in which consumers respond tochanges in the prices of healthcare services. The elasticity factorsthat have contributed to the rising healthcare costs in the U.Sinclude income levels, time costs, the necessary nature of healthcareservices as well as the lack of substitutes for healthcare services.Regarding income levels, many scholars argue that healthcare can becategorized as normal goods since a rise in household incomes isoften accompanied by a rise in healthcare expenditure. Feldstein(2012) reports that studies have established that the incomeelasticity of health care expenditure tends to increase with income,with the approximate elasticity levels for low, middle andhigh-income countries being 1.49, 1.19 and 1.0 respectively. Thestatistics show that the income differences in different countriestranslate to the differences in healthcare expenditures, withhigh-income countries such as the U.S devoting large portions oftheir GDP to the delivery of healthcare services.

Time costs also playa significant role in determining whether individuals would seekhealth care services or not. According to Feldstein (2012), the timeone takes to visit a healthcare facility and wait for the servicesinvolves an opportunity cost. If individuals foresee that they willspend a greater deal of time seeking medical services, they willdemand less of it. The longer it takes to access healthcare services,the more costly it becomes since those seeking the services would bewasting time they would otherwise have utilized to engage in incomegenerating activities.

The high cost ofhealthcare is also driven by the fact that there is no specificsubstitute for healthcare services. One can only visit a medicalpractitioner or a medical facility when they are sick, andLichtenberg (2012) supports this argument in his study to establishwhether home health care can substitute hospital care. He reportsthat the evidence obtained shows that hospital services cannot bereplaced by the services provided at home. The clear absence ofsubstitutes means that consumers cannot opt for alternative servicesand will be obliged to pay the prices quoted by the healthcareproviders. Another important elasticity factor has to do with thenature of healthcare services, as they are more of a necessity than aluxury.

Implicationsof the rising health care costs

According to Leick S. (2015), health care system in the United Statesis the most expensive country in the world. This increase in spendingis widely touted to have damaging effects on the U.S economy, whilechances of economic stimulation in other sectors of the same economy.

Employmentand benefits cost

The increasedspending in the health sector has a positive impact on employment.The Affordable Care Act (ACA) that was signed into law in 2010 hascontributed to more job addition in this sector. Individuals aredeployed in insurance companies or public insurance schemes,pharmacists, and healthcare providers. Others are employed intraining institutions for health students as well as with theNon-Government Organizations (Leick S. 2013)

On the otherhand, small businesses who must compete for the best talent availablein the job market find it had to bear with the rising healthcarecosts. Since the established businesses have better insurancepremiums and employee family health plans, small businesses face achallenge in attracting or retaining their best workforce. Whatarises is resorting to part-time jobs and cutting down the workinghours. This leads to unemployment.

Even the high-endfeel uncomfortable with the high health care costs. Employees are nowpaying for the insurance premiums as the shifting of costs is done bytheir employers. Deductions are also transferred on the worker.Others who cannot work over 30 hours are relieved of their duties ifthey fail to accept the programs for offering stipends to helppurchase health cover through a public exchange (Natha P. 2013)

Entitlementspending crisis

The U.Sgovernment has an obligation to pay its elderly and poor populationssome funding in forms of retirement or other benefits. The elderly,poor and the disabled have pensions and healthcare privileges such asthe Medicaid and Medicare. These programs have shown a significantrate of unaffordability in the national budget, and are likely tocause a financial meltdown.

The entitlementshave resulted in a rise in taxation. Costs that the government incursdue to the financing of the public health and pension benefits areincreasing by day forcing an increased tax rate. The problem itselfis high healthcare spending. The per capita spending in thehealthcare sector is higher than what is spent on the baby-boomretirement. The long-term is likely to be a change in the eligibilityof those who qualify for the elderly benefits, security funds, andpublic healthcare.


The rising costsof healthcare have lowered the GDP and increasing inflation. Thefunding of this expenditure is a nightmare to both the national andfederal governments. It has affected interest rates and alsoinfluenced the economic outcomes of major industries. For thisreason, financial deficits injure the export of industrial goods.Long-term loans are the high on the side of the government, whilethere is a clear uncertainty of how such loans will be paid ifhealthcare monster is not sorted.


The risinghealthcare cost in the U.S has increased employment opportunities andalso resulted in cases of unemployment to the cost-shifting ofmedical premiums by employers. The level of borrowing and debts hasalso increased to cover the entitlement crisis that is directlyaffected by the hyped Medicare and Medicaid. To solve the crisis,both national and federal governments should design gradual ways toreduce pensions and health benefits for the elderly and the poor andfoster a free market system in the healthcare sector. Furthermore,efforts should be in place to increase taxation to cover the skyrocketing costs of healthcare.


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