The Economic Implications of Rising Health Care Costs

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In the past few decades, the costs of health care have risen tremendously. The combination of an aging population, unhealthy lifestyles, and wasteful spending among other factors are reasons why the United States is spending so much money on health care. In many instances, defensive medicine that includes unnecessary tests and treatments is one of the main reasons for high health care prices. These rising costs for health care have great economic implications for the country that include a distortion of the country’s job market, significant cuts on federal and state spending, and less productive contributors to the economy.

Beginning around the 1950s, health care began to change into a system of private insurance for those who could afford it. According to Health Care Crisis History, “at the start of the decade, national health care expenditures [were] 4.5 percent of the Gross National Product” (2013). Also, many medications and vaccinations became available for diseases such as polio during this time. The price of hospital care also doubled during the 1950s.

Medicine became even more expensive in the 1960s, as many major medical insurance companies endorsed high-cost medications. Medicare and Medicaid were signed into law during the 1960s, and people “outside the workplace, especially the elderly, had difficulty affording insurance” (Health Care Crisis History). By the 1990s, health care costs in America rose to twice the rate of inflation. This was the beginning of the true economic implications of rising health care costs.

Inflexibility in the job market is one of the major implications of high health care costs on the economy. In fact, rising health care costs are “one of the main reasons for weak growth in workers’ real wages and salaries” (Hamilton). The contributions by employers to health insurance costs absorb “more than half of workers real gains in compensation” (Hamilton). Most of the cost of insurance is left to the workers, as they are paid lower wages and have other benefits taken away from them. Employers have also changed the status of many low wage workers to part-time, eliminating their insurance. Or, they now hire independent contractors to perform low-paying jobs.

Additionally, “higher health costs have also made the availability of employment-based insurance more important in choosing a job. The result has been to reduce the flexibility of the labor market and possibly to hamper its ability to respond to new challenges and opportunities” (Hamilton). More job seekers looking for employment that offers health insurance means fewer job seekers for uninsured jobs, creating unevenness in employment and job competitiveness.

Rising health care costs also ultimately hurt small businesses in the long run. For one, “rising insurance premiums mean there's far less money for new equipment, better facilities, research or expansion” (Johnson). This equals less available jobs as well as low raises and higher health premiums for small business employees. This further limits consumer spending which definitely affects the economy in a negative way.

Rising health care costs also have a significant effect on the federal government’s budget. The cost of Medicare and Medicaid is rising steadily, and total Medicaid spending in the United States “was $431.0 billion in 2012” (Total Medicaid Spending). Budgeting for higher health care costs results in rising interest costs on the federal debt by billions of dollars. Spending on health care in this country “totals about $2.5 trillion, 17.5 percent of our gross domestic product, a measure of the value of all goods and services produced in the United States” (Johnson). And it is only going to get higher in the coming years due to the progressive decline of the health of Baby Boomers.

The budgets of the state and local governments also face economic implications of rising health care costs. States will have to spend more money to finance health spending. This means the government will have less money for public health services and providing welfare and food assistance. States are also reducing funds for grants to local governments for education. They are also unable to provide sufficient tax relief for residents.

Rising health care costs have implicated the economy of the United States and they will continue to affect it for years to come if there is not a real health care reform that induces a change in the entire system. More and more middle-class and lower-class people cannot afford to go to the doctor for health complications because they do not have insurance. They also cannot afford to pay the doctors and hospitals outright. In turn, they avoid getting treatment and their conditions get worse.

The result of avoidance of treatment for various conditions is often chronic disease. As such, “the growing burden of chronic diseases adds significantly to escalating health care costs. Researchers predict a 42 percent increase in chronic disease cases by 2023, adding $4.2 trillion in treatment costs and lost economic output" (The Facts About Rising Health Care Costs). More and more people will not be able to work and be a contributing member to the economy because they are suffering from chronic diseases like Type 2 diabetes and long-term health complications. This seemingly spiral effect is perhaps the biggest economic implication of rising health care costs. An unhealthy population will not be able to work, spend money, or pay bills. Ultimately, this will put a halt on the American economy as we know it.

Works Cited

Hamilton, Douglas R. Economic implications of rising health care costs. Washington, D.C.: Congress of the U.S., Congressional Budget Office, 1992. Print.

"Health Care Crisis History." PBS. PBS, n.d. Web. 16 Feb. 2014. <>.

Johnson, Linda A. "How health care affects the economy." Daily Herald. N.p., 19 June 2009. Web. 17 Feb. 2014. <>.

"The Facts About Rising Health Care Costs." The Facts About Rising Health Care Costs. N.p., n.d. Web. 15 Feb. 2014. <>.

"Total Medicaid Spending." Total Medicaid Spending. N.p., n.d. Web. 17 Feb. 2014. <>.