Economics of Healthcare in the United States of America

by Sarthak Kejriwal

The global pandemic of COVID-19 has revealed the reality behind the healthcare system of the United States.


The US, grappling with over 1.7 million cases and 100,000 deaths due to the COVID-19 pandemic, ironically spends the most on healthcare ($3.6 trillion, 2018) as a share of its GDP (16.9%). And while this crisis laid bare the fractures of the system, it has also juxtaposed the stark socio-economic disparities that have facilitated America’s dire position today.


How is the US health-care system devised


Healthcare is not only a fundamental component of society but has also become an integral part of the economy because of its sheer economic size and consequential nature.


The US health-care sector now employs 11 percent of American workers and accounts for 24 percent of government spending.


It is one of the largest categories of consumer spending (8.1 percent of consumer expenditures). Therefore any changes in investment, consumption, and government expenditure in the healthcare sector will have sizable effects on the economy as a whole.



Given its essentiality to life and well-being, and far-reaching implications on the economy, most OECD countries, envisaging a market failure, sought to regulate it either via national insurance or a publicly funded healthcare system ensuring its universal provision.



However, the healthcare system in the US employs a manifold approach: it is a combination of provisions by the federal government in the form of Medicare, Medicaid, and veterans’ benefits and private insurance coverage.


While Medicare is the federal insurance program for senior citizens (65 years and older), Medicaid is the health coverage for socially and economically backward communities, pregnant women, children, and people with disabilities, which is funded by the state and federal government in tandem.


The rest of the market, which is the majority, involves employee insurance (that is jointly funded by employers and employees) and other personal insurance programs.


While one might state that given a free, competitive market, the price of health must have significantly lowered over a long period of time, it does not explain why the price of angioplasty in the US is $32,200, compared with $6,400 in the Netherlands, or $7,400 in Switzerland.


Rise in Prices


There are a myriad of economic factors that have led to the exponential rise of prices of health in the US, which necessitates us to discuss the underlying causes behind the existence of such factors.


Firstly, the medical industry comprises a highly specialized labor supply: it takes a minimum of 11 years of studies and heavy toil at medical school before a student can start practicing medicine.



The system also ensures that the labor supply is restricted thereby ensuring high prices of medical personnel. Since the labor costs are so high in the medical profession, it drives up the treatment costs.


Arising from the high technical qualifications of medical personnel is the information asymmetry between doctors and patients that has led to an increase in prices as well.


Information asymmetry is the phenomenon when among the two agents engaging in a transaction, one of them has prior or better information about the nature of the exchange which places the latter at an economic advantage over the former.


While patients are relatively less aware of the nature of the problems they are afflicted with, it places the doctor at an advantageous position to prescribe high-cost cures.

Another important factor that has led to an increase in prices is the concentration of the market or the increase in the elimination of competition among hospitals - large hospitals pay higher salaries to lure the best physicians, paramedics, and administrators because of which they have higher negotiating power while discussing the costs of treatments with insurance companies and patients.


By eliminating the competition, these large hospitals have left patients and insurance providers with very little choice but to yield to the prices demanded by them.


One of the larger impending issues which has been affecting costs is the increasing median age of US citizens which has increased to 38.2 years according to the US census bureau.


This means that more than 50% if the US population has an age greater than or equal to 38.2 years.



This aging population has had implications on the health care costs as an aging population is exposed to a significantly higher amount of health risks.


It has consequently led to a significantly higher demand for healthcare and hence, higher prices for treatments and insurance premiums.


As healthcare providers continue to increase their prices, pharmaceutical industries have also had their share of the pie by increasing their prices.


Well, is this not too orchestrated to be true?


Has Adam Smith’s ‘invisible hand’ failed the citizens?


The fundamental problem lies in the fact that citizens individually do not have the negotiating power to bargain with the healthcare system. And where the Market fails the citizen, the State steps in.


The Federal government, through Medicare and Medicaid, represents a large pool of people as a result of which it has collective bargaining power with the healthcare sector, significantly reducing per capita costs.


Present reality and Covid-19


With jobless claims soaring to a post-war high of 40 million, many people have lost their employee insurance or face a substantial threat of losing it.


About half of all Americans receive their insurance through their jobs, with the average family paying more than $20,000 for insurance every year, according to the Kaiser Family.


Therefore, people have been left hung out to dry in a crisis when the exposure to risk is the highest.


To mitigate the effect of the crisis, the Federal Government launched a publicly funded program that will cover 28 million uninsured Americans for the cost of coronavirus testing and treatment.


However, the scope of this program is too narrow as it only provides coverage for COVID-19 positive patients and does not deal with insuring the unemployed.


Those who are unemployed must yield expensive private insurance schemes and those who are both unemployed and uninsured would have to pay out of their pockets or file for Medicaid.


However, states, which partially fund Medicaid, are currently in financial distress - the federal government, reluctant to assist many of them on the verge of bankruptcy, shall hinder the prospects of the applicants from seeking Medicaid.


The systemic risk which has long been building up over the years has been amplified by the crisis.


Several small hospitals that were serving rural communities are facing a financial crisis since as early as March and the government had imposed restrictions on elective or non-urgent surgeries which provide them with the largest source of revenue.


These rural hospitals were already in financial distress prior to the pandemic due to market consolidation by large hospitals, reduction in commercially funded healthcare, and lack of adequate physicians and resources.


As the pandemic has burgeoned across the US, these cash-strapped rural hospitals are the front line of defense for people who are relatively more exposed to risk than people residing in urban areas: the median age of people in rural areas is 51 years, placing them at a higher risk of conceiving the disease due to higher chances of having preliminary heart problems and diabetes.


These hospitals are hence ill-equipped to handle the crisis which looms over them.


No of rural hospitals being shut down annually in the US


Many urban hospitals that serve low-income communities are in financial distress not only due to restrictions on elective surgeries but also because they are currently facing a surge of Covid-19 patients, most of which are uninsured.



People belonging to low-income groups have a significantly higher chance of being both uninsured as well as being exposed to the virus.


Many of these hospitals have not yet received aid by the Federal government and there is no money coming in from commercial insurers.


These hospitals can neither afford to keep their staff on furlough (leave without pay) due to the rapid influx of patients nor can they afford to continue paying their physicians and medical personnel. They are running on fumes.


The CARES act has made a provision for $100 billion for health-care providers to assuage their concerns about financial distress.


Of the $130 billion set aside for the health-care system, $100 billion shall be used to reimburse providers for COVID-19–related expenses and lost revenue.


This however is a temporary plaster for a fractured system that has orchestrated to fail the American citizen, especially the poor, the most.


The system has sincerely ensured that the price of angioplasty in the US is $32,200 as compared to $6,400 in the Netherlands, or $7,400 in Switzerland.


While the fault lines in the system were widening over the years, the pandemic, which came at a time when economic disparity was very high, played a pivotal role in magnifying them.


Cronkite is known for his departing catchphrase, "And that's the way it is". The onus is on us to prove him wrong.



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