Managerial Economics: US Healthcare Costs, Causes, and Solutions

This report examines the significant and continuously increasing medical costs in the United States, a primary concern affecting a large portion of the population. It delves into the economic aspects of this issue, analyzing the historical trends of healthcare expenditure, comparing them with other developed nations, and identifying the key drivers behind the cost escalation, such as government programs and changing disease patterns. Employing economic tools like indifference curve analysis, the report interprets the problem and further proposes legislative measures, including increasing competition in the healthcare market and revising insurance bidding structures, to potentially mitigate the rising costs. The analysis covers data from 1960 to 2017, offering insights into the long-term trends and comparative perspectives on the healthcare cost crisis.

Running head: MANAGERIAL ECONOMICS
Managerial Economics
Name of the Student
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Author Note

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Table of Contents
Introduction......................................................................................................................................2
The medical cost in USA over the years.........................................................................................2
Causes behind the problem of increasing medical costs in the USA..............................................7
Economic Interpretation of the problem..........................................................................................7
Legislative Suggestions...................................................................................................................9
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

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Introduction
In the global scenario, the most influential country in the world has been and still is the
United States of America. The country has been showing consistent growth in every aspect of
economy as well as in social and overall welfare aspects. The residents of the country enjoys a
higher standard level of living than many of the countries in the global scenario and the policy
frameworks of the country make provisions for scope of continuous monitoring of the efficient
performance of the country in the welfare parameters like health, education, life expectancy,
employment and others. However, in spite of being a sustainable and powerful country, the USA
does face several issues in overall framework, which in the current period of time have become
primary issues of concern among the governing authorities. One of such issues is the constantly
increasing costs of medical and health care in the country in general, which is affecting a major
share of the population adversely. The report tries to take into account this ongoing issue of
concern in the country and it tries to interpret the causes behind the same from an economic
point of view. The report also tries to suggest several legislative measures, which can be
undertaken in this aspect by the government of the country.
The medical cost in USA over the years
The medical sector of the country is one of the largest industries in the USA with the total
health care costs amounting to almost 3.2 trillion USD. The industry contributes around 18 per
cent of the total Gross Domestic Product of the country, in 2016. However, the industry
amounted to only 5 per cent of the GDP of the country in 1960 and the total health care costs
amounted to only 27.2 billion USD at that point of time. This shows that the cost of medical care
in the industry has considerably increased within a few decades (Iuga & McGuire, 2014).

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Figure 1: Changes in the medical costs in the USA over the years
(Source: Forbes.com, 2017)
As can be seen from the above figure, the medical costs in the country has been showing
a consistently increasing trend from 1960 to 2012 and is still increasing even though the
economy and the political scenario of the country have experienced substantial changes over the
years. The periods of recession, boom or any other substantial economic and non-economic
phenomena did not affect the trends in the increase in the health care costs in the country, as can
be seen from the continually increasing percentage of the same in the GDP of the country
(Berwick, Nolan & Whittington, 2017).

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Figure 2: Trend of increase in the cost of different aspects of livelihood in the USA over years
(Source: Bloomberg.com, 2017)
The above figure shows that over the years the overall cost of living in the country has
become substantially high, with the costs abruptly increasing in the last three decades. The two
primary components, which contribute to this substantial increase in the cost of living of the
residents of the country, are the medical costs and the higher education costs, including college
fees, with the former experiencing a higher increase than the latter (Oshima Lee & Emanuel,
2013).

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Figure 3: Country wise comparison of the change in the total expenditure on health care as the
percentage of the gross domestic product of the countries
(Source: Bloomberg.com, 2017)
As can be seen from the above figure the increase in the health costs of the USA has been
the highest as compared to the other developed economies in the world, which includes
Germany, United Kingdom and others. The increase of the health care costs has been even more
steep in the last few decades, thereby showing that health care costs is one of the primary issue
of concern in the country as a whole and to the policy makers and residents in particular.

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Figure 4: Annual Healthcare Costs by Age in different countries
(Source: Pwc.com, 2017)
The above figure shows that the age wise per capita healthcare costs per year is seen to be
distinctively high for the age group of 60 to 90 years for the USA and the same is seen to be
higher than the other developed countries. The difference in the per capita health care costs of
the age group between 60and 90 in the USA and in other countries is so high that where the same
is $15,000 for Germany, which ranks the second in this aspect, it is nearly $45,000 for the USA.
From the above figures, it is therefore evident that the residents of the concerned country
bear a huge burden of medical costs, especially those who fall in the elderly aged people’s
category, which makes this issue a matter of grave concern among the people in general in the
country.

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Causes behind the problem of increasing medical costs in the USA
There are several factors which contribute in the increase in the cost burden of the health
care industry in the USA:
Firstly, the programs created by the government of the country, like those of Medicare or
Medicaid, for the betterment of the citizens without the privilege of getting health insurances
privately, increased the demand for the same considerably. As the government relies on the
private companies for the supply of these services, the rise in demand facilitated the suppliers to
increase their prices, thereby increasing the burden of the government in this aspect (Cooper,
2013).
Secondly, with the change in the lifestyle of people in the country, the disease burden has
shifted from being simple preventive to complex and highly difficult to cure. Chronic illnesses
like cardiac problems, pressure and diabetes are becoming common in every household of the
country, which are highly expensive and complex in nature. As can be seen from the empirical
evidences, the top five percent of the sick population, consume more than 50% of the total health
care costs of the country (Oberlander, 2012).
This phenomenon can be explained with the help of the economic concepts and tools,
which is elaborated in the following sections.
Economic Interpretation of the problem
In economic theory, the behavior of the consumer can be explained with the help of the
indifference curve theory. Indifference curves are a microeconomic tool which shows the
different consumption bundles, in a simplified two commodity economy, which gives the same
level of satisfaction to a consumer. On the other hand, the budget line of a consumer shows the

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different commodity bundles which the consumer can afford with his given amount of income
(Rader, 2014). The equilibrium occurs at the point where the indifference curve is tangent to the
budget line of the consumer.
In this case the situation shows that the medical costs in the country has grown up much
faster than the other consumption costs, which can be interpreted with the help of the following
diagram:
Figure 1: Indifference Curve and Budget Line
(Source: As created by the author)
As medical goods and health care fall under the category of necessity goods, with the
increase in the costs also the demand does not fall substantially because people usually try to

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curtail other costs to accommodate the increased prices of health care in their relatively lower
purchasing power. This can be seen from the above figure, where with the increase in the cost of
health care, the budget line rotates from AB to AB1 and the new indifference curve becomes
IC1, with the new equilibrium being E1. The demand for health care services decreases only a
little from H0 to H1 but the other consumer demands fall extensively from C0 to C1 (Folland,
Goodman & Stano, 2016).
Therefore, the above economic interpretation of the concerned problem is relevant to the
empirical data findings, which show that the medical costs have increased comparatively much
higher to that of any other consumer costs.
Legislative Suggestions
The concerned problem of continually increasing costs of health care, borne by the
government of the country, also having effects on the residents of the country as well, can be
solved with the help of the following strategies, which have the potential to reduce the problem
substantially if implemented appropriately:
 One of the primary ways to reduce the increasing costs in the health care sector of the
country is to increase the competition in the supply side sector of the industry. This has
been supported by the empirical evidences found for the country which shows that the
lowest cost plans had a 7% increase in the premiums in the counties in which there are no
new insurers. However, in the counties where new insurers have entered, the premiums
increased by only 1% (Berwick, Nolan & Whittington, 2017).

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 The bidding of the medical policies, especially Medicare Part C and similar ones, being
very complicated, the process of bidding should be made easy. The scheme being an
over-paying one, the benchmark should not be set based on the government’s level, but
on the basis of the actual bidding of the insuring companies (Feldstein, 2012).
Conclusion
As discussed in the previous sections, the medical costs of the USA has been constantly
increasing in the last few decades. the causes of these constantly hiking prices are mainly the
government policy framework and the nature of diseases which are primarily common in the
contemporary period. The health care being a necessary commodity, the demand for the same is
also highly inelastic. The problems can however be solved by proper implementation of
strategies of increasing the supply side competition in the market and revising the bidding
structure for the insurance companies.

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References
Berwick, D. M., Nolan, T. W., & Whittington, J. (2017). The triple aim: care, health, and
cost. Health affairs.
Bloomberg.com. (2017). The U.S. Pays a Lot More for Top Drugs Than Other
Countries. Bloomberg.com. Retrieved 2 November 2017, from
https://www.bloomberg.com/graphics/2015-drug-prices/
Cooper, K. J. (2013). The Obamacare dilemma. Diverse Issues in Higher Education, 30(15), 14.
Feldstein, P. J. (2012). Health care economics. Cengage Learning.
Folland, S., Goodman, A. C., & Stano, M. (2016). The Economics of Health and Health Care:
Pearson International Edition. Routledge.
Forbes.com. (2017). Forbes Welcome. Forbes.com. Retrieved 2 November 2017, from
https://www.forbes.com/sites/chrisconover/.../the-cost-of-health-care-1958-vs-2012/
Iuga, A. O., & McGuire, M. J. (2014). Adherence and health care costs. Risk management and
healthcare policy, 7, 35.
Oberlander, J. (2012). The future of Obamacare. New England Journal of Medicine, 367(23),
2165-2167.
Oshima Lee, E., & Emanuel, E. J. (2013). Shared decision making to improve care and reduce
costs. New England Journal of Medicine, 368(1), 6-8.

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Pwc.com. (2017). Retrieved 2 November 2017, from https://www.pwc.com/us/en/health-
industries/health.../behind-the-numbers.html
Rader, T. (2014). Theory of microeconomics. Academic Press.