Managerial Economics: Analysis of US Healthcare Costs and Policies

This managerial economics report analyzes the rising healthcare costs in the United States and their impact on consumers. It begins with an executive summary highlighting the increasing medical costs and the report's objective to provide an economic overview using indifference curves and suggest legislative actions. The report then delves into the US healthcare market, discussing the increasing costs since 2000 and the challenges faced by the healthcare system, including the influence of third-party payments and governmental insurance programs. The analysis utilizes the concept of indifference curves to illustrate how consumers make choices between healthcare services and other goods under budget constraints, demonstrating the shift in the budget line due to rising medical costs. Finally, the report offers legislative suggestions, such as tax reductions on healthcare products, government-sponsored health campaigns, subsidies for medical research, and the formation of a supervisory group to monitor healthcare services, aiming to improve the constituents' satisfaction levels. The report concludes by emphasizing the negative impact of increasing medical costs and the effectiveness of the indifference curve approach in explaining the economic scenario.

Running head: MANAGERIAL ECONOMICS
Managerial economics
Name of the university
Name of the student
Author Note

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Executive Summary:
In the U.S, the medical cost has been increasing significantly over the past decade, which in
turn has adversely affected the Senator’s constituents by a large extend. Hence, this report, on
behalf of an economic advisor of the government, is trying to provide a brief overview of this
economic phenomenon using the concept of indifference curve. After that, some legislative
suggestions are also provided.

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Table of Contents
Introduction:...............................................................................................................................3
Health market in the U.S.A:.......................................................................................................3
Analysis with the help of indifference curve:............................................................................5
Legislative suggestions:.............................................................................................................8
Conclusion:................................................................................................................................9
References:...............................................................................................................................10

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Introduction:
Over the past decade, the U.S has been experiencing an increasing trend in medical
cost compare to other consumer costs, which in turn has become an important issue for both
private and public sectors of this country (Salami et al., 2017). Thus, it is essential for the
senator to understand the impact of this changing cost structure on the constituents and to
adopt suitable policies to reduce this burden. With the help of an economist, a brief analysis
can be done based in the light of some basic economic concepts. Hence, this report, on behalf
of the economist, is going to represent the brief analysis regarding the impact of rapidly
increasing medical cost, with the help of indifference curve concept and along with this, some
legislative suggestions can be provided over here.
Health market in the U.S.A:
The modern world has experienced significant improvement in medicinal science by
innovating new treatment facilities and medicines. The country, by possessing the largest
economy of the world, has owned large numbers of hospitals, medical research centers and
other medical facilities with modern technologies. In both public and private sectors, this
medical cost is increasing significantly since 2000 and within ten years, this cost has become
almost double, that is, from $ 1.2 trillion in 2000 to $2.3 trillion in 2011(Bacon & Samuel,
2017). However, the cost to obtain those facilities is comparatively high, especially for some
serious disease like cancer, which is becoming a serious issue for each country, including the
U.S. The health system of this country has remained unable to provide medical facilities to its
entire citizens, which in turn, has forced people to acquire health insurance from their private
spending.

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According to some free-market critics, the country’s health care system is facing
some problems due to the third-party payment system from insurers, as a person faces
difficulties to choice between financial and medical costs. In addition to this, availability of
the governmental insurance, through Medicaid and Medicare programs, has helped to
influence this problem to a large extend. Availability of this public healthcare facility has
provided basic utilization which in turn has helped to increase the consumer demand.
According to a medical journal in 2013, this demand has occurred on the basis of new
treatments, increasing costs of drugs, lifestyle factors, and higher priced technologies and
advanced diagnostic testing and so on (Dickman, Himmelstein & Woolhandler, 2017).
However, those governmental programs have provided low reimbursement rates, which
sequentially have led citizen to bear more private costs and consequently, the middle-income
group people has suffered more.
Figure 1: Total retail value under the consumer health market between (U.S.D, million)
Source: (Bor, Cohen & Galea, 2017)

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The above diagram has sharply depicted the increasing trend of total retail value of
the consumer health market between 2012 and 2017. Based on 2017, the country has
experienced almost U.S. $ 69640 million market value and thus this market has huge
significance on the country’s economic condition (Bor, Cohen & Galea, 2017). Hence, the
Senator can take some legislative decisions to protect this market.
Analysis with the help of indifference curve:
Due to increasing medical costs, it has become difficult for the citizens of the U.S to
choose between health care services and other consumer products with their given budget
constraint. This situation can be described more precisely with the help of indifference curve
approach (Hayakawa & Venieris, 2016). This curve helps a consumer to choose different
combinations of two goods or more than that, from which the concerned person can achieve
the equal level of satisfaction.
Figure 2: Indifference Curve
Source: (created by author)

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In figure 2, an indifference curve is drawn that gives same level of satisfactions
between various combinations of good X and good Y. Here, good X is measured along the X
axis and good Y is measured along the Y axis. Due to the marginal rate of substitute (MRS),
the indifference curve slopes downward convex to the origin. The diminishing MRS implies
that if the consumer wants to consume extra unit of one good, the person needs to sacrifice
some quantity of another one, to maintain the same level of satisfaction (Paserman, 2017).
However, being a convex curve, the amount of substitution does not remain same, which
means, to consume one unit of good X, the concerned person needs to sacrifice more than one
unit of good Y, where the opposite situation can also be occurred. The consumer can get
same utility level along a particular indifference curve while higher level of curve represent
higher utility level, which a consumer always tries to attain. However, it becomes difficult
for the concerned person to achieve this because of budget constrain.
On the other side, the budget line is a downward slopping straight line, where increase
in consumer’s income can be represented by shifting the curve upward and for the opposite
phenomenon, the curve shifts downward (Fisman, Jakiela & Kariv, 2017). When the price of
one good changes, remaining the price of other good same, the curve also shifts accordingly.

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Figure 3: The budget line
Source: (created by author)
The above diagram has depicted a downward sloping budget line, where by entire
income, the consumer can purchase OB amount of good X or OA for good Y or any
combination of both goods with this limited income.
Hence, in an indifference map, consists with more than one curve, the consumer can
get the highest amount of satisfaction level where the budget line equates with indifference
curve (Anderson & Bates, 2017). In the U.S., a constituent has also a budget constraint, based
on which, the combination of health care service and other products, can be chosen to obtain
the higher level of satisfaction.
Figure 4: Equilibrium combination of two goods
Source: (created by author)
The above diagram has depicted the equilibrium combination of health care
service and other consumer’s products at point A, where indifference curve IC0 meets with

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the budget line. Hence, at this point, the consumer can purchase OQ1 amount of other
consumer’s products and OQ2 amount of health care services.
However, after increasing the medical cost, the budget line in Y axis, has
shifted towards the origin, remaining the portion in X axis same as before (Fisman, Jakiela &
Kariv, 2017). Thus, in this new budget line, the combination of two goods has also changed.
Figure 5: Shift in budget line
Source: (created by author)
Hence, above diagram intends to depict the consequences of shifting the
budget line, due to the increasing cost structures of health care services. This has led a
consumer to select IC2, which provides lower level of satisfaction compare to the IC0.
Legislative suggestions:
Thus, it is essential for the senator to choose some actions for all constituents to
control this increasing cost structures through implementing appropriate policies. The
government can reduce the tax on health care products and treatments significantly.

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Moreover, by organizing various health campaigns, the government can provide medical
treatments and drugs with lower costs, for the middle-income and lower-income group
people, who have affected adversely more through this increasing cost structure, compare to
high-income group people (Gostin, Hyman & Jacobson, 2017). For medical research and
innovation of other technological products for treatment, the government can also provide
subsidies. It is also essential to form a group of supervisors, who can monitor the health care
services of both public and private sectors (Obama, 2016). By providing different heath care
services, like sufficient medical insurance and free treatment for children and old people, the
government can help all constituents to live in a higher indifference curve with more
satisfaction level.
Conclusion:
In conclusion, it can be said that the increasing medical costs are affecting the citizen
of the U.S in a negative way. The government of this country can take various steps, like tax
reduction or free medical treatments for children and old people, to reduce this burden on all
constituents and the whole scenario can be explained sharply with the help of the indifference
curve approach of economics.

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References:
Anderson, S. T., & Bates, M. D. (2017). Hedonic prices and equilibrium sorting in housing
markets: A classroom simulation. National Tax Journal, 70(1), 171.
Bacon, N., & Samuel, P. (2017). Social partnership and political devolution in the National
Health Service: Emergence, operation and outcomes. Work, employment and
society, 31(1), 123-141.
Bor, J., Cohen, G. H., & Galea, S. (2017). Population health in an era of rising income
inequality: USA, 1980–2015. The Lancet, 389(10077), 1475-1490.
Dickman, S. L., Himmelstein, D. U., & Woolhandler, S. (2017). Inequality and the health-
care system in the USA. The Lancet, 389(10077), 1431-1441.
Fisman, R., Jakiela, P., & Kariv, S. (2017). Distributional preferences and political
behavior. Journal of Public Economics, 155, 1-10.
Gostin, L. O., Hyman, D. A., & Jacobson, P. D. (2017). The Affordable Care Act: moving
forward in the coming years. Jama, 317(1), 19-20.
Hayakawa, H., & Venieris, Y. (2016). Consumer interdependence via reference groups.
In Behavioral Interactions, Markets, and Economic Dynamics (pp. 81-99). Springer,
Tokyo.
Obama, B. (2016). United States health care reform: progress to date and next
steps. Jama, 316(5), 525-532.
Paserman, M. D. (2017). Using the Two-Period Model to Understand Investment in Human
Capital. National Tax Journal, 70(1), 185.

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Salami, J. A., Warraich, H., Valero-Elizondo, J., Spatz, E. S., Desai, N. R., Rana, J. S., ... &
Blumenthal, R. S. (2017). National trends in statin use and expenditures in the US
adult population from 2002 to 2013: insights from the Medical Expenditure Panel
Survey. Jama cardiology, 2(1), 56-65.