Rising Medical Costs and Diminished Spending Ability

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Abstract

This paper centers around the impact of indifference curve analysis on changing economic conditions. In this particular case, the indifference curve analysis method is being employed to explore the impact of rising medical costs on other spending abilities. The current escalation in medical costs is so exponential that many are having trouble affording healthcare. This has an impact on other forms of business as well since people are unable to afford other expenses. According to AHIP (America's Health Insurance Plans) over one-sixth of the entire US economy is devoted to healthcare, meaning that any significant change in the costs therein has a nearly immeasurable impact on the economy overall. Moreover, AHIP asserts that up to 30% of the money being spent on the United States healthcare system (800 billion annually) is being spent frivolously. All of this out of control spending could be more responsibly managed and used to provide healthcare services to more people.Keywords: Medical Insurance, Indifference Curve, US Economy

Rising Medical Costs and Diminished Spending Ability

According to Hall and Diehm (2013), the United States is leading the industrialized world in medical spending per capita at a rate of $8,508.00. This is very interesting when measured against countries that practice socialized medicine such as Great Britain who spent $3,405.00 per capita. Of course, much of this discrepancy could be attributed to the wasteful spending mentioned earlier. The United States is an interesting position due to the fact the healthcare system is not fully socialized as of yet. While the recent efforts on behalf of President Barack Obama to provide healthcare in both a more cost-effective and widespread way have been thorough, their efforts have (as of yet) born little fruit. Examining the previous system yields evidence to suggest that having a component such as Medicare combined with the private medical insurance market has proven to be quite hazardous in some instances.

Currently, the most vital and urgent change that needs to occur within the United States medical system today is aggressive oversight into wasteful spending. Hospitals, Doctors and other medical staff need to be made aware of the fact that money saved on one procedure or patient could be spent elsewhere. Oversight into these areas could be made less prohibitive in terms of government spending by creating financial incentives for hospitals to save money where Medicare patients are concerned. Of course, any incentives and their subsequent results would have to be subjected to a rigorous code of ethics.

Van de Water (2013) discovered evidence that the cost of medical devices has skyrocketed over the past several years, making this a good area to start looking at for potential reform. The inflated costs of these devices make them incredibly lucrative for the companies selling them, but the costs incurred by the insurance companies and their customers are becoming unbearable. Research done by the Rosenthal (2013) discovered that a replacement hip implant costs $350.00 to produce and is being sold for $13,000.00. This does not include the surgery itself which comes out to around $65,000.00. This is the type of out of control spending that often comes as a result of being able to charge huge fees for items that are only provided by a scant number of companies. While the word monopoly might not be wholly appropriate here, the word oligopoly just might apply in this situation. Encouraging these companies to begin cutting back prices on their end would significantly lower the cost of these procedures. Offering tax-based incentives and government loans to companies who are willing to produce and sell these devices at a lower price would be a good solution in the event of a stalemate with existing companies.

All of these factors culminate in having a huge impact on the minds of consumers because they have to adjust for these additional costs. Medical costs are at the very top of the basic needs of any person due to being linked to survival; after medical costs come food, shelter, utilities, and transportation. Unfortunately for many businesses today it has become obvious that the services and goods they provide fall towards the more apathetic end of an indifference curve. While the satisfaction of having a nice meal while dining out is assured for many people, they can become indifferent towards the activity if they are having to worry about medical bills.

Information from Baye and Prince (2014) stated that the indifference curve suggests that while citizens are struggling to pay for their medical bills they are not willing to pay for other things. Any sort of spending that might have been seen as 'discretionary' is now going to be either spent on medical costs or saved. This fallout in personal finances has had a huge impact on local businesses in the form of diminished revenues. The disposable income that people once had is now shrinking, and reversing this phenomenon needs to be a priority. Of course, the recent addition of the Affordable Care Act has caused a rise in the cost of medical insurance for some while lowering it for others, so addressing this first and foremost should be a priority. Negotiating with insurance companies to lower what they charge for coverage in exchange for the medical services being provided also being lowered in cost would be the easiest solution to this issue.

Consumers are going to choose a mode of consumption that maximizes their level of satisfaction for as little cost as possible. With this in mind, it becomes imperative to lower the cost of a need as huge as that of healthcare as quickly as possible. There are few other expenses other than necessities that will impact the spending ability of a consumer. Assuming that the costs of all necessities become affordable enough to allow consumers to buy other goods, they have reached what is known as 'Equilibrium Choice.'

If the medical service providers are charging the insurance companies less for the procedures being performed than they should be able to ease what they ask of the consumer. Of course, the amount of money being charged to those who are covered by government insurance such as Medicare needs to be adjusted in kind. Standards established through government insurance can often carry over into the private insurance realm, which drives up the cost of the insurance in question. While this is not true in every instance, every little bit helps to keep costs down and encourage companies to lower what they charge to private consumers.

Research done by Forbes found that the current trend in rising medical costs is a rise of around 4% annually. In 2012 the cost of NHE or National Healthcare Expenditure was around 3.75 trillion dollars, and in 2014 It was around 3.95 trillion. By the year 2016, it will have exceeded 4 trillion dollars per year being spent on healthcare in the United States. To put it into perspective in the year 2002 the average family of four spent $9325.00 on healthcare, while in 2012 they spent $20,728.00. This increase in spending is simply staggering and warrants an immediate overhaul of any areas within the healthcare system that are not functioning properly. The most recent chance to do this was through the American Healthcare Act, but unfortunately, there is still a lot of work left to be done. The problem with this particular scenario though is that these are issues that cannot just be legislated or litigated away, these are private businesses that are enamored within the entire economy of the country. Bearing in mind that there are thousands of other businesses depending on the continued spending of medical institutions, medical employees and medical device manufacturers, it becomes obvious that any changes made must be gradual.

What is needed in this particular instance is a series of laws designed to motivate private companies who sell medical products and services to charge less. Tax incentives cannot be used across the board due to the amount of government money that would be lost as a result. One of the best ways to encourage these companies to drop their prices would be to include a measure of security in terms of their future business arrangements. The money of future customers can gradually replace the amount of money that was being made by charging a premium on medical devices and services. This would allow for more people to afford medical insurance, which of course would create more consumers of these products. Tax incentives could be used as an interim solution until more people go out and apply for coverage. While this plan will take years if not decades to lower the cost of medical care to reasonable levels, it will do so without causing turmoil in other sectors of the economy.

References

Baye, M. R., & Prince, J. T. (2014). Managerial Economics and Business Strategy. New York City, NY: McGraw-Hill/Irwin.

Rosenthal, E. (2013, August 3). In Need of a New Hip, but Priced Out of the U.S. New York Times.

Van de Water, P. N. (2013, October 18). Lowering the Cost of Medical Devices. In www.offthechartsblog.org. Retrieved March 26, 2014

Hall, K., & Diehm, J. (2013, October 18). Why U.S. Health Care Is Obscenely Expensive, In 12 Charts. Huffington Post.

Munro, D. (n.d.). Retrieved from http://www.forbes.com/sites/danmunro/2012/12/30/2012-the-year-in-healthcare-charts/