The Economics of Health Care in the US
The interplay of health and economics, which is referred to as health economics, is an applied field of study allowing for the rigorous and systematic examination of the problems faced in promoting the health of the population. Through the application of economic theories of consumer, social choice, and producer-related, health economics aims to understand the behaviors of individuals, health care providers, both private and public organizations, as well as governments in decision-making. The discipline of health economics is relevant to the current in health, especially considering the ongoing debates regarding the inefficiencies in US healthcare, which range from insurance to resource allocation and the overworked healthcare workforce.
Health is considered an essential human capital component that can support the productivity of the workforce by means of improving its physical and mental capacity and capabilities. The improvements that are taking place in the health care industry impact can be aimed in different pathways. However, at most, such improvements, which result in better health, directly increase participation in the labor market and worker productivity. The increased life expectancy creates incentives to put financial resources in education, innovation, and better physical capital. Moreover, better health, specifically related to women, can reduce fertility and facilitate an economic transition from the state of stagnating income and toward sustained income growth. Thus, health and development have a positive correlation at a macroeconomic level.
Key Economic Challenges in Health Care
In the United States, medicine represents a vital business industry with its own expenditures aimed at health, research, as well as other health-related products and services, the costs of which have increased in the recent decades, having grown tenfold since 1980 (Peter G. Peterson Foundation, 2020). In 2018, the spending of the country on healthcare amounted to $3.6 trillion, which averaged to approximately $11,000 per person (Peter G. Peterson Foundation, 2020). The sector of healthcare uses 11% of American workers and accounts for 24% of government spending (Nunn, Parsons, & Shambaugh, 2020). Moreover, health insurance is the most significant component (26%) of non-wage compensation (Nunn et al., 2020). Therefore, the healthcare industry is concerned with substantial spending, even though there is a range of economic challenges that must be addressed.
Considering the fact that a well-functioning healthcare sector is a prerequisite for a well-functioning economy, the issues that the US sector is experiencing are substantial. The US invests more than other nations in health without obtaining better health incomes, as suggested by Papanicolas, Woskie, and Jha (2018). Even though the country usually spends approximately two times more as other developed countries on medical care, although the utilization rates were mainly similar. Prices of goods and labor, including pharmaceuticals, as well as administrative costs, have shown to be the primary facilitators of the misalignment in the overall expenses between the US and its ‘peer’ countries.
An important health challenge in the industry refers to private health insurance. In contrast to other Western countries that have national systems of healthcare and insurance, the US predominantly depended on the direct-fee system, in which patients under sixty-five (Medicare covered those that are sixty-five and older) were expected to pay for medical costs themselves, aided by private health insurance, usually through an employer (University of Minnesota, 2010). Medicaid is an insurance that offers health coverage for low-income individuals, families and children, the elderly, people with disabilities, and pregnant women. In some states, the program covers all low-income adults that are below a certain income level (HHS Digital Communications Division, 2017). Despite the availability of some insurance programs, there are severe challenges associated with enrollment and coverage, which present additional issues to the economics.
The economic inefficiencies associated with the US insurance coverage have been primarily related to the challenges of Medicare enrollment. Specifically, there is no single government entity in charge of enrollment, which means that beneficiaries instead are getting communications from numerous unassociated entities. In addition, the process of enrollment takes place via the Social Security Administration instead of CMS, which experts consider a more natural option (AARP, 2020). Another inefficiency is associated with beneficiaries accruing penalties for not making a decision within the timeline or for selecting the wrong health plan. In addition, beneficiaries of Medicare usually have a strict window of seven months around their sixty-fifth birthday to choose their plan, which can often lead to rushed decisions.
Beyond Medicare and Medicaid, health insurance in the country presents challenges for individuals that are not covered by the two programs. In 2019, 28.9 million non-elderly individuals were uninsured, which was an increase of more than a million from 2018 (Tolbert & Orgera, 2020). Coverage losses were mainly promoted by the declines in Medicaid and non-group coverages, and were especially large among children and the Hispanic population (Tolbert & Orgera, 2020). Due to the challenges associated with insurance, more than half of Americans have to have private insurance, either with the help of their employers or from their own resources.
Insurance-related issues, specifically the lack of insurance, have adverse consequences because the population is less likely to receive preventive care as well as care for different illnesses and conditions. For instance, because uninsured Americans are less likely compared to those with private insurance to receive screenings for cancer, they are more likely to be diagnosed with more advanced cancer than an earlier stage (University of Minnesota, 2010). Therefore, it is imperative that the healthcare industry considers the limitations associated with health insurance to facilitate the economic effectiveness and prosperity of the industry.
High Costs of Healthcare Services
The high costs of US health care represent a significant economic challenge because they hinder the sustainability of services. Healthcare expenses can be considered a function of price, which is represented by currency charged for care services and their use, which is the number of services implemented. There are some additional factors that can boost care price and utilization, thereby increasing healthcare expenditure. The two most important factors include the aging population and rising prices of healthcare (Peter G. Peterson Foundation, 2020). An aging population represents a challenge because of the mandatory coverage under Medicare of individuals aged sixty-five and older (Peter G. Peterson Foundation, 2020). Moreover, the older population is, in general more likely to spend high amounts on healthcare, which increases the total expenses on healthcare over time.
Prices are a significant factor in lowering economic efficiency, with the price of healthcare items and services growing more rapidly than the prices of other goods and services in the US economy. In the past twenty years, the Consumer Price Index (CPI), which is the average change in prices paid by urban consumers for various goods and services, has increased annually at an average of 2.1%, while the CPI for medical care has increased at an average rate of 3.5% per year (Peter G. Peterson Foundation, 2020). Considering these statistics, it is essential to take into account the possible reasons for the increase in healthcare prices. For example, more costly procedures and items are linked to the development of new and innovative healthcare technologies. Another example is the burden caused by the multi-dimensional nature of the US healthcare system, which leads to administrative inefficiencies in payment systems for insurance and provider services. Finally, the hospital consolidation can result in the limited competition or even a facility monopoly, which grants providers the opportunity to increase the process.
From the microeconomic perspective, high healthcare expenses in a high-income country is not necessarily a negative indicatory, specifically if it is correlated to better outcomes of health. However, in the US, this is not the case, which points to the lack of industry efficiency and its return on investments. When analyzing the common metrics of health, the US has shown to perform worse compared to other countries despite high spending on health. The high expenses put a strain on an already challenging financial situation. The containment of the increasing healthcare costs is essential for the country’s long-term fiscal and economic prosperity.
Solution: Value-Based Care
The current macroeconomic climate suggests that the global healthcare industry needs significant change and modification, especially in the light of the COVID-19 pandemic. In the current state, health care policy is at a constant push and pull between economics and humanitarianism, which suggests that the industry is doing everything in its power within the boundaries of available resources. Therefore, to solve this issue, it is imperative to achieve
“accurate, transparent, and replicable monetary estimates of shared savings” within the value-based care framework (Wells, 2020, para. 1).
Over the past ten years, it has become possible to test various methods of monetizing the benefits resulted from value-based care, with no explicit indication concerning the methodology resulting in the highest estimate of fidelity. While such a way of monetizing presents a certain level of ambiguity because of the limited best-practice standard, it is essential to make value-based care the core economic framework of US healthcare. In contracting of healthcare services, ‘value’ represents the financial equivalent of a system of interconnected, timely, and appropriate services provided to a given individual that results in an improved health outcome than anticipated initially. In such a context, value is a macro-level measure of both what takes place and does not (Wells, 2020). Particular to the latter value measure, targeted efforts are necessary to monetize health care externalities. The main tools that most champions in value-based contracting use are the quasi-experimental and actuarial trend-based methods. Quasi-experimental methods are concerned with an “retrospective evaluation of an expected outcome observed in at least two cohorts, such as treated and untreated, from the same population matched on a common set of individual-specific attributes at least two times” (Wells, 2020, para. 9). Actuarial methods that are trend-based differ in methodology and usually depend on two or more years of longitudinal analysis that concerns a target population. Usually, the factors that are being measured have shown to relate to technology, income, inflation, and morbidity to reveal an empirical estimate of the expected trend without the health improvement program (Wells, 2020).
A prominent quasi-experimental method for the value-based care implementation is Coarsened Exact Matching (CEM), which is a relatively simple and transparent tool to implement. It was widely used for evaluating the effectiveness of nurse practitioners in the co-management of dementia, acute care utilization, hospice use outcomes, and long-term care admissions (Wells, 2020). The use of CEM necessitates only two main decisions by the value-based contract’s parties, such as the identification of the coinciding factors and binning levels for non-binary factors. Such steps can be automated and include computing the mean of the outcome by “cohort, strata, and time period, the mean of the income by strata and within each cohort, subtracting the intervention period outcome mean from the baseline outcome mean, and exactly match the cohorts by strata and subtract the treated from the untreated cohort first difference values” (Wells, 2020, para. 11). CEM’s construction is such that end-users within health care facilities can directly relate to the value’s loss or gain between a particular individual being treated and the healthcare program that is being used.
For providers, value-based care is a robust and comprehensive methodology for measuring the value that appears across their panel for health plans, employers, and patients who are self-insured. As a result, it is likely to increase the possibility of greater reimbursement, positive collaboration with a high-quality provider, and an explicit look on the practices responsible for positive outcomes. Importantly, for patients that are likely never to know the care they receive is correlated with shared penalties or savings for their providers, the importance of value-based care can be realized by the improved outcomes of health, lower expenditures out-of-pocket, and more time spent outside the health care system.
AARP. (2020). How do social security and Medicare work together? Web.
HHS Digital Communications Division. (2017). Who is eligible for Medicaid? Web.
Nunn, R., Parsons, J., & Shambaugh, J. (2020). A dozen facts about the economics of the US health-care system. Web.
Papanicolas, I., Woskie, L., & Jha, A. (2018). Health care spending in the United States and other high-income countries. JAMA, 319(10), 1024-1039. Web.
Peter G. Peterson Foundation. (2020). Why are Americans paying more for healthcare? Web.
Tolbert, J., & Orgera, K. (2020). Key facts about the uninsured population. Web.
University of Minnesota (2010). Social problems. Web.
Wells, A. (2020). The value of value-based care. Web.