Rising Healthcare Costs in the U.S

RisingHealthcare Costs in the U.S

RisingHealthcare Costs in the U.S


Thesociety’s demand for healthcare arises from a combination offactors that affect the desire of each person to have good health. Itis everyone’s wish to be healthy as it enables them to feel betterand function at their preferred level of performance. With goodhealth, individuals in the society engage in activities they love andbring them personal satisfaction. According to Feldstein(2012), thosewho place 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.

Justlike every other commodity, increased need for healthcare eventuallyleads to an increase in healthcare spending. The need for healthcareis determined by a combination of other underlying factors, includingchanges in the health of a population, population size, agecomposition, environmental quality as well as educational attainment.Regardingchanges in the health of the population, the increased prevalence ofcertain types of diseases often leads to increased demand for relatedhealthcare services, which consequently drive up the cost. Rosseter(2014)reports that the increased incidences of illnesses due to exposure toenvironmental and occupational hazards as well as increasedprevalence of non-communicable diseases due to lifestyle changes haveled to a rise in demand for healthcare services. The situationimplies that a significant portion of the American population suffersfrom one or more life-threatening disorders, a factor that hascontinued to pile pressure on the current healthcare system, therebydriving up healthcare costs.

Thechanges in the age composition of the American population have becomemore apparent, with the number of older individuals increasing at afaster rate than that of younger persons. Feldstein(2012)points out that the increase in the population of the agedindividuals has pushed up the demand for healthcare services giventhe many healthcare complications that come along with aging.Regarding environmental quality, there is credible evidence thatsupports the fact that the more the environment deteriorates, thehigher the prevalence of environment-related diseases. Illnessescreated by poor air and water quality require the attention ofhealthcare professionals, especially when a huge section of thepopulation is affected.

Thepopulation size in the U.S has been steadily increasing over the pastthree decades, and this is attributed to the influx of immigrants.The increase in the total number of people in the U.S has also beenaccompanied by an increase in the demand for basic healthcareservices. In a bid to meet this demand, more investments inhealthcare facilities, personnel and technologies have been made, afact that has pushed up the overall cost of healthcare. With the U.Spopulation projected to hit 336 million people by 2020, thehealthcare costs are also expected to increase even further(Rosseter,2014).Educational attainment is another important factor influencing thedemand for healthcare services. Individuals who are more educatedtend to be more aware of the benefits of staying healthy. They adopthealthy daily activities, including frequent visits to their doctorsfor checkups. Highly educated individuals also seek to have thehighest quality of healthcare services, which requires well-trainedprofessionals and state of the art equipment that come at a highcost.

Feldstein(2012) positsthat according to the law of demand, a person’s quantity demand ofhealthcare increases with a lower out-of-pocket price. He reiteratesthat the extent to which health insurance covers medical services isthe single most important determinant of out-of-pocket price.Healthcare coverage through the Medicare and Medicaid programs hassignificantly reduced the out-of-pocket prices of most healthcareservices. Consequently, this has led to greater demand for theservices, pushing up the overall healthcare costs.


Froma microeconomic theory perspective, supply factors play aninfluential role in determining the cost of a good or service. Whenthe supply of a commodity is lower than its market demand, then thecommodity becomes more costly. The key factors determining the supplyof healthcare services that have contributed to the rising healthcarecosts in the U.S include the price of medical inputs, medicaltechnology as well as the internal organization of healthcareinstitutions.

Theprice of medical inputs is determined by several underlying factors,including the price paid for medical supplies, the price of owningcapital equipment as well as the level of wages paid to medicalpractitioners. Feldstein(2012) arguesthat taking the productivity of medical inputs to be constant, ahigher price of the inputs would automatically translate into alimited supply of healthcare services. Consequently, the limitedsupply increases the price of healthcare services due to the priceinelastic nature of healthcare demand. The number of healthcarepractitioners can also be viewed as part of the medical inputs. Overthe years, the U.S has been experiencing a shortage of medicalpractitioners such as nurses and doctors. Cooper (2015, p.314) pointsout that the country is facing a severe shortage of doctors, with theshortage expected to hit the 137,000 mark in the next fifteen years.The Association of American Medical Colleges (2016) reports that theshortage in medical practitioners over the coming years will be infour main areas, namely primary care, surgical specialists, medicalspecialists and other specialists. The situation implies that theavailable specialists will be under increased pressure to deal with arelatively large number of patients, a fact that will limit thesupply of the specialist services, thereby pushing up the healthcarecosts 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) arguesthat in the medical field, the new technologies tend to compliment asopposed to replacing old technologies. He further points out that asmuch as the new technologies have facilitated the saving of manylives, the costs of treating various diseases tends to rise with theutilization of the said technologies. Most of the newer technologiesare costly to acquire and maintain, meaning that patients have to paymore. According to him, the new technologies have created a moralhazard problem in which medical suppliers willingly avail thein-demand technological advances with the main aim of reaping hugeprofits as opposed to saving lives. Consequently, the increaseddemand for insurance coverage to pay for the new interventions leadsto higher healthcare expenditures and costs.

Anotherimportant determinant of the healthcare cost is the internalstructure of the organizations providing healthcare services. Theorganizations have varying internal structures depending on theirscope, scale as well as ownership. Regarding scope, some healthcarefacilities specialize in the delivery of very few medical serviceswhile others offer a wide range of services. Those offering a widerange of services require more specialists and often have a hugenumber of patients to deal with, a factor that makes them incurhigher costs compared to specialized facilities. Regarding ownership,the absence or presence of property rights has a direct impact oneconomic incentives. Healthcare organizations in the U.S are eithernot-for-profit, for-profit or public. The different healthcareinstitutions behave differently concerning output, pricing as well ascharitable decisions. According to Feldstein(2012),public and not-for-profit healthcare organizations are under littlepressure to minimize the costs of delivering services compared tofor-profit entities. Most of the for-profit entities are privatelyowned, meaning that the rise in the cost of healthcare can beattributed to the increase in the number of privately held for-profithealthcare organizations.


Theyrefer to the factors that determine the manner in which consumersrespond to changes in the prices of healthcare services. Theelasticity factors that have contributed to the rising healthcarecosts in the U.S include income levels, time costs, the necessarynature of healthcare services as well as the lack of substitutes forhealthcare services. Regarding income levels, many scholars arguethat healthcare can be categorized as normal goods since a rise inhousehold incomes is often accompanied by a rise in healthcareexpenditure. Feldstein(2012)reports that studies have established that the income elasticity ofhealthcare expenditure tends to increase with income, with theapproximate elasticity levels for low, middle and high-incomecountries being 1.49, 1.19 and 1.0 respectively. The statistics showthat the income differences in different countries translate to thedifferences in healthcare expenditures, with high-income countriessuch as the U.S devoting large portions of their GDP to the deliveryof healthcare services.

Timecosts also play a significant role in determining whether individualswould seek healthcare services or not. According to Feldstein(2012),the time one takes to visit a healthcare facility and wait for theservices involves an opportunity cost. If individuals foresee thatthey will spend a greater deal of time seeking medical services, theywill demand less of it. The longer it takes to access healthcareservices, the more costly it becomes since those seeking the serviceswould be wasting the time they would otherwise have utilized toengage in income generating activities.

Thehigh cost of healthcare is also driven by the fact that there is nospecific substitute for healthcare services. One can only visit amedical practitioner or a medical facility when they are sick, andLichtenberg (2012) supports this argument in his study to establishwhether home healthcare can substitute hospital care. He reports thatthe evidence obtained shows that hospital services cannot be replacedby the services provided at home. The clear absence of substitutesmeans that consumers cannot opt for alternative services and will beobliged to pay the prices quoted by the healthcare providers. Anotherimportant elasticity factor has to do with the nature of healthcareservices, as they are more of a necessity than a luxury.


AssociationAmerican Medical Colleges. (2016). NewResearch Confirms Looming Physician Shortage – News Releases -Newsroom – AAMC.Aamc.org.Retrieved 27 September 2016, fromhttps://www.aamc.org/newsroom/newsreleases/458074/2016_workforce_projections_04052016.html

Cooper,M. (2015). Currentissues and emerging trends in medical tourism.IGI Global.

Feldstein,P. J. (2012). Health care economics. Cengage Learning.

Lichtenberg,F. (2012). Is Home Health Care a Substitute for Hospital Care? HomeHealth Care Services Quarterly,31(1),84-109. http://dx.doi.org/10.1080/01621424.2011.644497

Rosseter,R. (2014). American Association of Colleges of Nursing | NursingShortage. Aacn.nche.edu. Retrieved 28 September 2016, fromhttp://www.aacn.nche.edu/media-relations/fact-sheets/nursing-shortage