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Economics 14

Lecture 9: Health Care

health care spending in the U.S.
why have health care costs risen?
health insurance
Medicare and Medicaid
other causes

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Health Care Spending in the U.S.

The United States annually spends nearly $1 trillion, about 14 percent of GDP (a measure of the total amount of goods and services produced during the year), on health care. This comes to around $4000 per capita. The top 1 percent of people ranked by health care expenditures account for 30 percent of total health care spending. The top 5 percent of people account for 55 percent of total spending while the bottom 70 percent account for just 10 percent.

Where it goes (1999 data):

1. hospitals $391 billion
2. doctors 269 billion
3. prescription drugs 100 billion
4. medical research 22 billion

Where it comes from (1999 data):

1. private insurance $355 billion
2. Medicare 214 billion
3. Medicaid 186 billion
4. out-of-pocket patient expenses 187 billion

Why Have Health Care Costs Risen?

One reason is our aging population. The elderly consume 4 times as much health care per capita. A second reason is the financing mechanism. Like private health insurance does for the general population, Medicare and Medicaid give the elderly and poor the means to demand health care.

Health Insurance

deductible

the amount the patient has to pay before the insurance company pays anything

copayment

set dollar amount or percentage of bill after the deductible has been paid that the patient must pay

types of insurance plans:

1. fee for service
   • go to any doctor you want
   • doctor bills insurance company; insurance company pays its share and doctor bills patient for the rest
   • maximum physician choice but highest premiums and deductibles and copays because of little control over expensive and unnecessary procedures
2. HMO
   • see a specific doctor at beginning of problem; may then be referred to a specialist
   • rely upon rules to control costs but rules may conflict with doctors' wishes for patients
   • least physician choice but lowest premiums, deductibles, and copays
3. PPO
   • doctors agree to charge a specific amount in return for being part of the network
   • some physician choice but some control over expensive procedures
   • moderate premiums, deductibles, and copays

Why does insurance raise health care prices? Having insurance increases demand and decreases elasticity.

With a 25 percent copayment, if the price were 4 times as high patients would want the same amount of health care they wanted at P1 without insurance.

Medicare and Medicaid

Medicare and Medicaid are forms of public health insurance. Medicare provides health insurance for the elderly and Medicaid covers the poor. The increase in demand for health care by the elderly and the poor raises health care prices.

By providing free health care to the poor, Medicaid increase the total demand for health care. Health care prices rise from P₁ with no Medicaid to P₂ with free medical care for the poor.

Other Causes

• new expensive technologies
• third party payers like insurance companies and Medicare have made little effort to question the size of hospital bills and physician fees

David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building phone: (717) 771-4115 fax: (717) 771-4062 e-mail: web: www.yk.psu.edu/~dxl31