Health System, Care and Economics in USA.

Subject: Healthcare Research
Pages: 14
Words: 3612
Reading time:
13 min
Study level: College


Today, Health care crisis is the most pressing problem of American economy leaded by soaring costs, uninsured employment and a continuous corrosion of corporate health benefits. The CED (2007) report tells us some amazing facts about American health care according to which $3.5 billion a year is wasted on medication errors, while 1.5 million patients are hurt by various experiments done in the name of ‘medication’ (CED, Report 2008). In addition to the funds wasted on health care, most of the drugs that are prescribed remain effective in only 60 percent of treated patients whereas 30 percent to 40 percent of every healthcare dollar which contributes towards 16-17 percent of GDP is spent on costs associated with overuse, underused, misuse, duplication, system failure, unnecessary repetition, poor communications and inefficiency (CED, Report 2008)

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American health care has only added layers of complexity to the future funds of financing and delivery of medical care, and has solved none of the underlying economic dilemmas. Policies have only initiated a new set of political, cultural, and behavioral problems for poor Americans who cannot afford medical aid. According to Kleinke (2001) “If managed care provides us with one overriding message, it is this: the U.S. health care system as currently structured is so complicated and rife with economic conflict that every attempt to simplify it actually complicates it further” (Kleinke, 2001, p. 3).

A community hospital generates revenues of $100 million, with many teaching hospitals having revenues exceeding $500 million annually. In such circumstances it is obvious that nowadays, before a doctor can select a treatment, the health plan must select the Competing insurance plans were virtually identical, offering indemnity coverage with unlimited access to physicians and hospitals. Employers selected a plan mainly on the basis of price and customer service, where good service was taken to mean prompt and accurate payment of bills.

American Health Economics

For the current situation of health in America, most researchers blame the HSA (Health Savings Account) due to some reasons. America is among one of the wealthiest economies in the world where levels of consumption have been fixed and unlike underdeveloped or poor nations where 50 percent of the population live on less than $1 per day today, America enjoys richest consumption levels (McPake et al, 2002, p. 4). These consumption levels are actually indicators that tell us that whenever resource constraints are low, people consume goods that would in other circumstances be considered of very low priority. The main problem with American health care funding is the unrealistic economics needs which are based upon impractical assumptions. Such assumptions are even unrealistic to generate useful analysis and conclusions.

With the gradual rise in health care costs when employers first turned to Managed Care Organizations (MCOs) to hold down health care costs, they knew little about them and so relied on independent benefits consultants to sort out their choices. Since these consultants seemed to know less about managed care than did their clients, some employers took it upon themselves to develop expertise in health plan selection. They carped up the health insurance section of their benefits departments and gave the same consideration to the purchase of health insurance as they did to the procurement of other key productive inputs. By the 1990s, large employers were adopting what the United States General Accounting Office described as an “active purchasing strategy, a systematic way of identifying and offering a mix of health care options that meet a purchaser’s expectations in terms of access, quality, and price” (Dranove, 2000, p. 94).

In managing single or multiple plan employers shoulder a significant responsibility. If employers feel like MCO quality concerns, MCOs are liable to provide it for if they ignore the quality, MCOs might be able to ignore it as well. American economists long ago discovered that one of the most cost-effective ways for employers to attract and retain good employees is to offer health insurance. The reason is simple as most workers find it fairly expensive to purchase insurance on their own. Not only is it costly for insurers to write individual policies, but insurers prefer selling to employer groups, which tend to have stable health care risks. In addition, employees who obtain insurance through work get tax advantages not normally available to individuals who purchase insurance on their own.

The current situation of American Health care

Today American life is characterized by the absence of universal medical protection and despite a medical system known as the most technically and scientifically advanced in the world; Americans still struggle more than citizens of other developed nations to gain access to health care. Research tell us that over forty million people in the United States have no health insurance, while government and private insurers offer health plans that are limited, restrictive, or prohibitively expensive. According to Hoffman “Hospitals are occupied by patients while emergency rooms have become the inefficient and costly providers of primary care for those who fall through the wide cracks in insurance coverage, and polls show that a majority of Americans are ‘frustrated and angry’ with their health care system” (Hoffman, 2001).

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The economic influencers of the present health situation are the insurance companies, which seemingly more of a white collar business than an exploitative industry, the insurance industry is still perceived as holding sway over the lives of workers through its control of the hugely successful industrial insurance market, which sold inexpensive life insurance to wage earners. Like employers, insurance companies possesses a major financial stake in the defeat of compulsory health insurance and not only the legislation competes directly with the most lucrative parts of the insurance business, but also their proposals systematically exclude profit making insurers from participating in the health insurance plan.

Health insurance in today’s America mean an economic loss for employers and insurance companies than it is for physicians. But the opposition of employers and insurers to health insurance cannot be explained solely by economic self-interest. Like physicians, businessmen made little distinction between economic questions and issues of autonomy and power. To be free to make profits, employers had to retain control over vital aspects of the workplace, a control that in Progressive Era New York was already being threatened by organized labor, reformers, and government. Insurers, too, fight to retain control over the extent, type, and cost of insurance they offer, especially as their industry come under increasing public scrutiny and government regulation. Their successful fight against health insurance help industrialists and insurers place significant limits on state involvement in business activity and insurance provision and for some employers, the quest for control mean that even increasing private benefits for workers at their own expense would be preferable to accepting government-run health insurance and indeed would be a means of opposing such a system.

The progressive mood of distrust of bold profiteering however makes it difficult for politicians, industrialists and insurance executives to oppose compulsory health insurance publicly on the grounds of economics. The health insurance campaigns force business leaders to express their economic interests in more diverse ways whether by emphasizing the superiority of private employee benefits, the dangers of worker abuse of compulsory health insurance, or the loss of jobs that being forced to pay premiums would entail, both employers and insurance companies in opposing health insurance sought to construct their self-interest as the public interest.

Economic Influencers of Market Failures in Health Care Insurance

Externalities present as a source of failure in health care markets, as they represent unsatisfied demand. For example, externalities arise where a society wishes to have the benefits of medical research that private enterprise is unwilling to undertake (Flood, 2000, p. 16). Government may intervene to meet this unsatisfied demand in society by directly subsidizing research and/or developing trademark or patent law to encourage private investment in research. Externalities serve as economic indicators in situations where we are prepared to pay for the consumption of health care services by others living in our community for example; it is of benefit that the whole community is immunized against contagious disease as this reduces each individual’s risk of infection (Flood, 2000, p. 16).

There are, however, impossibly high costs associated with each citizen attempting to identify and contract with those individuals who either cannot afford, or are reluctant, to be immunized. There is also a free-rider problem, as many citizens may not contribute in the expectation that others will pay or do the work from which they can benefit. Government may intervene to correct this market failure and to fulfil unsatisfied demand and it is noticeable that in a developed country, the intervention required, although very important, is not significant relative to total health care expenditures, as the risk of contagious disease has substantially declined in the twentieth century.

Demand for immunizations and other public health services is due to each individual’s desire to protect and maximize his/her own standard of health. However, many individuals in society are also prepared to pay for the consumption of health care services by others who cannot afford them on moral grounds. Refusing to supply basic care to a patient who cannot afford it may well result in significant extra costs subsequently being incurred if the patient’s condition seriously deteriorates. This will not be a problem if a society is prepared to allow those in need of care to suffer or die without medical assistance, however the existence of a caring externality suggests this will not be the case. Physicians find it difficult to refuse to treat the impecunious when faced directly with an individual who is at risk of serious harm or loss of life, but rather than bearing the costs of treatment themselves may seek to pass these on to other insured patients. Thus, even those in society not prepared to pay for health care services for those in needs may have these costs imposed upon them by others as a component of their own cost of health care.

Future of Health Care

The future can be easily predicted on the basis of unaffordable health insurance premiums subjected to high medical costs. These costs are expected to continually drive up because of the boneheaded way in which physician care for the uninsured patients, who are already unable to afford premiums in the first place. In addition to the artificially high number of medical residents that pushes physician supply and health care costs past true market equilibrium, there are other future burdens for hospitals likely to be created by their conflicting missions and charity care mandates. These burdens would create necessity pass along by the hospitals in what they charge for insured patients. Health insurers would then translate these higher charges into higher premiums, after adding their own administrative surcharges, which the market then translates into more uninsured people.

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The government’s attempts to subsidize charity care through poorly codified provisions in the tax code would obviously maintained in the future where most hospitals would be putatively non-profit, even though most data reveal profit margins among the not-for-profits that are on par with their for-profit competitors. A not-for-profit hospital’s tax-free status is threatened only when its charity care provision dips to such low levels that it sets off alarm bells at state or federal regulatory agencies or among consumer advocacy organizations (Kleinke, 2001, p. 171). Therefore this way the health care system would be managed in the absence of clear, unambiguous standards that would force the government to default to arbitrary enforcement a reactive process that in turn would encourage hospitals to game the system, fiddle with the numbers, and ultimately skimp on charity care.

In order to fix the problem in the near future the health department can commit the entire hospital industry, which provides the bulk of medical care to the uninsured, to one clear direction. Since charity care mandates and market forces has divided every institution like University Hospital against itself thereby pushing the entire hospital industry into a competitive race to the bottom, therefore a more sensible approach for the future prospects would be to choose once and for all an unambiguous tax-status path, rationalizing the process of hospital charity care through one of two very different, major, uniform changes to the tax code.

The tax system could convert all hospitals to for-profit status and use the new taxes collection to fund government reimbursements directly or to fund health insurance premiums for the uninsured, or to convert all hospitals to non-profit status and mandate uniform levels of charity care as a percentage of total collected revenues. Either option would encourage hospitals to provide medical services to the uninsured in a more proactive way, either one would do away with the hospital industry charity care endgame once and for all, and either one would be better than the worst of -all-possible-worlds that characterizes today’s health system for the uninsured.

Health-care providers that in the past have cared for the uninsured in part with leftover money from insured patients have seen those funds squeezed by managed-care cost cutting – a uniform tax credit for providing care to the uninsured as opposed to its current tax deductibility would start to reverse this insidious process.

Health Insurance Markets

Health insurance markets are closely related to and impact on demand and supply in health service markets. The analysis that follows demonstrates that the demand for and existence of health care insurance in an unregulated market contributes to and compounds market failures in health care service markets (Flood, 2000, p. 17). Apart from preventive health care services, our demand for health care services is frequently contingent on developing an illness or suffering an injury and we may not be able to predict the likelihood that this will happen. Consequently, we are often unable accurately to predict our own future demand for health care services and cannot always save for the cost of health care services needed in the future. This uncertainty coupled with the high cost of treating some diseases and afflictions means that in the absence of insurance even the most prudent individual could face financial ruin in the event of serious illness or injury. Serious illness or injury can be a financial disaster not only because of the cost of care but because an individual’s income-earning stream is interrupted or eroded permanently. Consequently, all other things being equal, there will be a demand for insurance to cover the risk of needing high-cost services like hospital services and even to cover the risk of needing relatively low-cost services over an extended period in the case of a chronic illness.

Adverse selection is a common problem which occurs in private insurance markets in the U.S industry when high-risk individuals choose to buy the most comprehensive insurance policy available. This problem is rooted, as are many problems in the health insurance and health service markets, in a lack of accurate information.

It is very difficult to estimate the magnitude of the adverse selection problem, however its potential seriousness is demonstrated by the fact that prior to the introduction of Medicare in 1965-6, 50 percent of Americans over the age of 65 were completely uninsured against the cost of illness and only half of those with health insurance had adequate coverage for hospitalization expenses (Flood, 2000, p. 17). Undoubtedly some of the uninsured elderly would have been prepared to pay a premium price that reflected their real risk but were unable to obtain coverage from insurers who could not or would not distinguish very high-risk elderly people from others. The fact that 5 percent of all the aged entitled to the government’s Medicare program account for over 50 percent its total costs and that 36 percent of those covered do not make any claims suggests that there are significant differences in risk between elderly individuals (Flood, 2000, p. 17).

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It is difficult to distinguish between the problem of adverse selection and the problem of high premiums for high-risk individuals. The operation of an unregulated private insurance market, where insurers compete on the basis of risk selection, will result in very high premiums or, perhaps, no coverage at all for the chronically sick and aged. A small fraction of the American population needs the health care services in a manner where health care expenditures for the disabled are five times more than those for the non-disabled, the old use far more medical services than the young and medical costs rise very sharply shortly before death (OECD, 1992, p. 35). In the US, about 72 percent of annual national health expenditures are spent on 10 percent of the population (Berk & Monheit, 1992). If an insurer can exclude individuals who are likely to frequently utilize expensive services then it can significantly reduce its operating costs. Thus, unlike sellers of most other goods and services, sellers of insurance have good reason to be concerned about who buys their services.

The irony is that the present scenario points our attention towards unregulated operation of a health insurance market in future which will result in those who objectively are in the most need of health care services being unable to obtain them because of the high cost of insurance or because of exclusionary policies. However, failure to provide affordable health insurance to those who most need it is not a source of market failure. The efficiency of the market is not undermined, in economic theory, by distributional inequities and such a view seems particularly impoverished with respect to health care.

Administration and Transaction Costs

Administration or loading costs increase as insurance companies seek to compete by assessing the risks of certain groups or individuals and these costs have to be included in the cost of health insurance premiums. Generally it is assumed that the total amount of health insurance demanded in an economy will diminish as administration or loading costs increase. According to Erhlich & Becker (1972) “However, Fuchs and Vladeck argue that demand for health insurance does not taper off substantially as premiums rise” (Erhlich & Becker, 1972). This mean that because demand for health insurance is relatively ‘inelastic’ therefore the demand for services is relatively unresponsive to changes in price and prices can increase significantly without the volume of services demanded declining to the same degree. Demand for health insurance is inelastic and people will continue to buy it even when it is very expensive, as people are risk adverse and gain utility from freeing themselves from cost considerations in the period of emotional strain associated with illness, disease or injury.

Possibly in case of health insurance where there are some economies of scale associated with the supply, they are said to occur where long-run average costs decline. Economies of scale usually occur in industries where there are high capital investments required before even one unit of service or good can be produced. Thus, the higher the volume of services or goods supplied the lower the average cost of producing each service or good. According to Flood (2000) “Those who argue that there are economies of scale in administration rely on the low administrative costs recorded in ‘single-payer’ systems like Canada, the UK, and New Zealand (where government pays for 70 percent or more of health expenditures) compared to multi-payer systems like the US (over 1,500 private insurers)” (Flood, 2000, p. 19).

User charges may also discourage poorer patients from seeing their doctors in the first place. Research tells us that in the face of user charges individuals are just as likely to forego those services they really need as opposed to those they may forego without harm. This again relates to a problem of a lack of accurate information, as patients may not know which health needs they really must seek help for and rely on their doctor to act as a filter. If patients forego essential treatment this can lead to more downstream costs for themselves and for the health care system overall. A large experiment conducted in the US by the RAND Corporation on the effect of patient user charges found user charges reduced utilization without adversely affecting health outcomes, except for low-income individuals with hypertension, vision or dental problems (Flood, 2000, p. 24).

Diagnosis Problem

This problem arises between a physician and patient as many patients are unaware of their health needs as well as the costs and benefits of particular treatments available to meet those needs. Given the cost and difficulties of acquiring information regarding the quality and appropriateness of services, patients are encouraged to rely on their physician’s professional skill. A patient’s physical or emotional distress or haste may contribute to a patient’s unquestioning reliance on his or her physician. This leads to the moral hazard problem in which the patients are unlikely to question the cost-effectiveness of a physician’s recommendations for treatment. Where physicians and other health providers are paid on a fee-for-service basis, they will have a critical financial incentive to recommend that their patients consume more of their own services than is cost-effective.

Although health care potential is appreciable for providers being able to influence demand for their own services, the empirical evidence for this is still debatable. On the one hand, there are many studies that conclude physicians and health service providers are influencing demand for their own services while on the other hand, there are commentators that argue that the proposition that fee-for-service reimbursement leads to practitioners supplying more health care services than is cost-effective is unproven. Clearly, there are variations in the ways that providers respond to financial incentives and that the reasons for provider behaviour are multi-factorial. Factors influencing health economical behaviour may include education and training, the practice of colleagues and peers, and absorption of ethical norms.


Berk M. L. & Monheit. A. C.,(1992) ‘The Concentration of Health Expenditures: An Update’, 11(4) Health Affairs 145.

CED Report 2008, Web.

Dranove David, (2000) The Economic Evolution of American Health Care: From Marcus Welby to Managed Care: Princeton University Press: Princeton, NJ.

Erhlich I, and Becker G, (1972) “Market Insurance, Self Insurance, and Self Protection” In: JPolit. Econ. 623 at pp. 623-648 as cited by Pauly, “Taxation, Health Insurance, and Market Failure in the Medical Economy”.

Flood M. Colleen, (2000) International Health Care Reform: A Legal, Economic, and Political Analysis: Routledge: London.

Hoffman Beatrix, (2001) The Wages of Sickness: The Politics of Health Insurance in Progressive America: University of North Carolina Press: Chapel Hill, NC.

Kleinke J. D., (2001) Oxymorons: The Myth of a U.S. Health Care System: Jossey-Bass: San Francisco.

McPake Barbara, Kumaranayake Lilani & Normand Charles, (2002) Health Economics: An International Perspective: Routledge: U.S

OECD (1992) Organization for Economic Cooperation and Development, US Health Care at the Crossroads (Paris: OECD).

Perkins Barbara Bridgman, (2004) The Medical Delivery Business: Health Reform, Childbirth, and the Economic Order: Rutgers University Press: New Brunswick, NJ.