Rising Cost in Healthcare Industry in America


The United States of America healthcare industry can benefit immensely from economic analysis concepts especially those related to microeconomic evaluations. In this healthcare system, the healthcare customers are always purchasing a service that they comprehend little about with a third-party payment structure due to the possible uncertainties (Cameron, 2013). This paper puts up a discussion on the current increase in the cost of health care within the United States of America as a formidable issue within the industry.

Overview of the Current Issues in US Healthcare

In regards to the total expenditures of 2013, America’s healthcare industry spent about $2,800 billion in healthcare related products and services. The use of funds in this sector is attributed to 64 per cent of the aforementioned amount being spent on hospital, physician fees, as well as on drugs and other related pharmaceutical products. The sources of funds are divided in a 50-50 per cent public and private basis (Cameron, 2013). Only about 11 per cent of the money is sourced from out-of pocket given that the major mode of payment is through third party agencies. Since the early 1900s, the trend of expenditure has continued to increase tremendously and a future forecast stipulates further increase. There has been a dramatic paradigm shift from the out-of-pocket payment system to the third party model; insurance agencies. Both the nursing home care and home healthcare are the potential growth areas (Cameron, 2013).

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In regards to health insurance coverage, it has been ascertained that it is employment-related or in other cases government availed. In 2011, adults of between the ages between 19 and 64 were more likely to have been uninsured as opposed to the young or old generation due to socio-economic attributes of the economy (Cameron, 2013).

The recent trends in the health insurance depict that there is significant shift from indemnity FFS to a managed care program like the PPO and HMO. The Obama’s Affordable Care Act is expected to take effect in 2014 and it is expected to involve insurance exchanges, personal mandates as well as an absence of pre-existing status exclusion (Cameron, 2013).

In the near future, the insurance is expected to be a fundamental choice variable of customers given that it is price-responsive in nature. There is a need to increase demand for the uninsured people as postulated by the government’s efforts deemed to encourage health markets for the uninsured for example by way of pooling over employers as well as the recent introduction of a special program; Children’s Health Insurance Program, to cater for the needs of uninsured children (Getzen, 2010).

Such managed care programs like PPOs, POS and HMO can also be fairly expounded using the economic concept of quality and quantity. For instance, it can be noticed that with the current increase in costs of health care there has been elimination of a relatively fast growth attributed to indemnification of insurance services. Subsequently, the present criticisms that are directed towards access to care have actually led to a decrease in the demand of HMO related programs while the supply of PPO has been increased as people are now conversant with the program (Getzen, 2010).

In regards to costs, it is established that a one-time cost saving of about 10-20 per cent is availed for those people favorably opting for HMOs. However, the resulting higher marginal costs that are attributed to premia have forced the failure of most of managed care firms in the United States of America (Getzen, 2010).

In relation to individual demand that sets to expound on the high costs of healthcare, it can be ascertained that price elasticity of health services continues to decrease significantly. Subsequently, the income elasticity of health based services is also considered to be low but is rather positive in this case (Getzen, 2010). This basically stipulates the fact that health is a normal good. Retrospectively, healthcare demand is certainly responsive to the aspect of time costs.

In regards to aspects attributed to factors of production like physicians pay, it also likely that they also have an effect on the current increase of health care costs that is passed to consumers. Currently, the physician quality is perceived as being very high while their respective quantities is ascertained to be at adequate high. Their income are deemed to higher given that a median physician earned about $225,000 while the overall average range of pay was between $200,000 and 350,000 for GP and general surgery personnel (Heath , Wise Romero and Reynolds, 2013). This quite significant level of income elasticity is partly attributed to the higher rates of return for human capital investment as well as formidable third party payment systems and licensing. However, in the near future, the costs of health care services are likely to improve due to a probable reduction in flexibility awarded to physicians as a result of efficient monitoring by others. There would also be a probable reduction in their income brackets due to the fact that there would be increased competition and substitution to nurse-practitioners (Heath , Wise Romero and Reynolds, 2013).

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Notably, it is argued that the current high costs of health care in the United States of America is attributed to higher costs associated with the purchase of pharmaceutical drugs. Their costs are relatively high whenever these drugs are patented (Heath , Wise Romero and Reynolds, 2013). Significant formulas are now being developed to curtail the possible utilization of high cost drugs. Consequently, in the future, the consumers are likely to be placed at a fair position to access fairer drugs due to the recent liberalization of advertisements made to potential consumers. It is highly probable that they would be more sensitive in choosing cheaper drugs substitutes like in the case of an expensive doctor consultation being substituted with alternative medicine. 


In conclusion, it can be seen that the healthcare industry in the United States of America is operating at higher costs levels hence passing the costs to the immediate consumers. This is despite the fact that the industry commands lots of billion dollars within the overall economy. Expenses in this sector are attributed to high physician pay, hospital administration as well as drugs and other products. A model proposed to rectify the issue rests with the economical analysis of such concepts of price-sensitivity of drugs and doctors’ advice, elasticity of physician income as well as the supply and demand of licensed doctors.