Five reasons behind rising health care costs

In this post, we digress to touch on the current favorite talking point in American social and political circles - health care.  We will address health care from a purely economic perspective, leaving aside all moral issues for the present.

Health care as an industry is cornering a growing percentage of American GDP. Healthcare costs accounted for 12% of American GDP in 1990, 16% in 2006 and are projected to rise to 20% of GDP by 2016. This means, that the average citizen (per capita) is spending a bigger percentage of his/her income on health care now compared to 20 years ago.

Health care is important (for any society, not just American society) from an economic standpoint because it increases the quality of life and productivity of society as a whole. Economically speaking, any investment that a society makes into health care would be a drain (a cost) if that investment did not cause a rise in productivity and GDP. On the other hand, when citizens feel that the benefits from health care do not outweigh the cost, they begin to resent the investment.

Health care can be demarcated into two kinds - elective and non-elective. Elective health care is chosen by individuals who are otherwise healthy, to correct for physical shortcomings. Non-elective health care is the cure of ailments without which the affected person will have a very poor quality of life.

Discussion in this post will be limited to non-elective health care, whose costs are borne by society rather than by individuals. What is also not part of this discussion, is whether a society has a moral obligation to provide health care to all its citizens (i.e. is health care a basic human right?).

We will focus solely on the factors that have contributed to non-elective health care grabbing a bigger piece of the GDP pie and not on the individual share of each factor (we leave that to other interested parties). From a 'big picture' perspective, the contributing factors boil down to five that we summarize below in no particular order:

1. deteriorating health of society - rise of chronic diseases like diabetes, high blood pressure and heart disease (aka "lifestyle diseases"), greater percentage of population contracting these diseases at a younger age and living to a greater age with them


2. inefficient health care - e.g. multiple ineffective options, unnecessary visits to doctors, treatment of symptoms rather than causes, non-emphasis on preventive health care, defensive procedures for fear of lawsuits


3. disproportionate allocation of profits from health care - e.g. pharmaceutical company executives, insurance company executives, hospital executives, lawyers specializing in medical lawsuits, doctors/surgeons


4. limited success in medical research - medical companies forced to make up for the cost of research by raising the price of health care accessories including medicines and drugs


5. increase in longevity of human life - retired people in need of medical care forming a greater percentage of the population

Moreover, health care costs are not borne equally by everybody in society.  For example, the "healthy insured" subsidize care for the "unhealthy insured", while tax-payers in general subsidize care for  the "unhealthy uninsured" who might use free clinics or emergency rooms (paid for with tax dollars) disproportionately.  This can lead to a vicious cycle - if health care costs become prohibitive, then more people opt out of paying for it (swelling the ranks of the "uninsured"), making costs even higher for the rest of the population - the "insured" and the tax-payers.

It is important to reach a consensus on which of the costs listed above are essential (e.g. care of the elderly) and which can be trimmed (e.g. costs associated with lifestyle choices such as diet and smoking). It is also important to understand which factors contribute more than others to health care costs. Not only will this help to identify measures for lowering costs, but it might also make it easier to decide whether the remaining costs should be borne proportionately by everybody in society.  In addition, an objective measure of the benefits of healthcare (by measuring increases in productivity and GDP) would help keep the burgeoning costs of health care in (economic) perspective.  

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