South-Western College Publishing - Economics  
With Health Care, US Learns That You Don't Always Get What You Pay For
Subject Health Care Spending Doesn't Provide a Corresponding Level of Benefits
Topic Economic Analysis, Supply and Demand; Elasticity, Utility and Consumer Choice
Key Words

Costs, Health Care, Insurance, Prices

News Story

Recent studies demonstrate that while U.S. citizens spend far more than any other country's citizens on health care services - about 14% of GDP compared to 8% for other developed nations - U.S. consumers receive fewer services and lower quality health care in some health concerns.

While the U.S. ranked first among OECD nations for breast cancer survival rates, it was at the bottom of the list for the number of successful kidney transplants. Life expectancy and infant mortality rates are much better in countries other than in the US; more doctors per 1,000 people serve in other OECD nations than in the U.S. (3.1 versus 2.7), and people in other OECD nations have access to more hospital beds per 1,000 people--3.9 versus 2.9 in the U.S.

Researchers argue that high administrative costs of doctors, hospitals and insurance companies in the U.S. create part of the disparity. Further, U.S. hospitals and care providers have significantly greater bargaining power than do consumers and insurance companies. Consequently, prices increase for a vast number of services. Researchers also argue that costs rise because of the high level of technology used in procedures and services. But is the high technology worth the price?

A Harvard health economist argues that by and large, technology does pay for itself. New procedures in areas like heart disease and low-weight births provide benefits that more than make up for the costs. Some areas, however, still require improvement. For example, research finds that Medicare spending could be cut by 20% without affecting quality of care. Many health economists argue for a pay-for-performance system for care providers. Hospitals with greater survival rates, for example, would receive higher payments. This way, providers would encourage needed tests, discourage unnecessary ones, and reward doctors for improving quality of life.
Such a pay-for-performance system presents its own host of problems, however. Hospitals could choose to treat only easily treatable cases, for example. Standardized procedures could prove to be limiting and in some cases ineffective, just as standardized education has shown to be limiting and ineffective in some cases.


(Updated August, 2004)

Questions
1.

The U.S. health care industry uses a large amount of technology in its services. What is this likely to do to the cost of health care? Illustrate your answer using a graph of supply and demand.

2. Third party payers pay for much U.S. health care--the insurance industry, for example, intervenes between patients and doctors. What does this fact do not only to the elasticity of demand for health care services by consumers, but also to the demand for health care? Illustrate your answer using a graph of supply and demand.
Source Jeff Madrick. "Studies Look at Health Care in the U.S." The New York Times. 8 July 2004.

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