The Pricing of Health Costs and its Effect on the Poor in the United States - Dissertation Example

? The Pricing of Health Costs and its Effect on the Poor in the United s …………………. College/ ………….. …………. Introduction In recent years, the relative price of healthcare in the US has been rapidly increasing to become highest in the world. Although there have been debates about quality of healthcare system, its policies and reforms, it is generally agreed that the healthcare in the United States exhibits incomprehensible contradictions in objectives, unnecessary variations in performance, efficiency and effectiveness and more importantly its pricing which often remains to be a challenge on poor. This part of the research paper focuses on reviewing relevant literatures about healthcare cost in the US and how it affects poor people who are relatively more needy to the healthcare-services than others. By reviewing various literatures, this part of the research develops a model presenting the relation between healthcare insurance claims and health risks. Healthcare pricing in the US According to Porter and Teisberg (2006), the US healthcare system is on a dangerous path due to toxic combination of high costs, uneven quality, frequent errors and peoples’ limited access to the services (p. 17). Out of these indicators, high cost seems to be a most challenging to the public, mainly to the poor. The healthcare services in the US are mainly delivered through private hands, but still, it is partially governed by free market forces. Healthcare service delivery and consumption do not meet the basic elements of a free market and is therefore often described as quasi-or imperfect market. In a free-market, there will be many patients- service buyers and many sellers, service providers who act independently. In such a situation, price is neither fixed by any external agency nor providers collude to fix it, but rather, prices are automatically governed by the forces of free-market due to the interaction of supply and demand forces (Shi and Singh, 2008, p. 12). But, when it comes to the US healthcare market, the consumers are general public with diseases who need quality medical services, payers are Medicare and Medicaid and sellers or providers are private or otherwise healthcare institutions. In such a marketing condition, prices are theoretically determined by the payers and not by market forces of demand and supply. Healthcare cost in the US has been rapidly increasing since 1960s, due to a number of factors including aging population, patient demand for high technology, need for best care available, technological advances, increasing therapeutic options and general economic factors like inflation (McCarthy and Schafermeyer, 2004, p. 649). A country can be said to spend in excess when it there is a differences between its spending per person on healthcare and its gross domestic product per person (Reinhardt, 2008). More specifically, the spending on healthcare in the US is more than that of other industrialized nations in the world and this cost increases surpasses the growth of various other important components of the US economy. most researchers found that Americans in general are highly dissatisfied of high cost of healthcare and its system as well (McCarthy and Schafermeyer, 2004, p. 649). How much does healthcare cost? Healthcare alone accounts to be one seventh of US national economy. The total spending on healthcare in the US in 1997 has been accounted to be $1,092 billion, which was twice as much as on education and three times as much as on national defenses. This spending also can be considered as one and half times as much as on healthcare per capita spending of Canada (Heshmat, 2001, p. 67). The growth of healthcare costs has been slowing down dramatically since 1992, with 4.8 % in 1992, 3.1 % in 1993, 1.5 % in 1995 and so on. Healthcare cost growth, but in declining level, thus has been an unusual one in the recent history of US healthcare spending. Though there were greater advances in managed care and there were much efforts from government to cut costs, the per capita healthcare spending grew much faster than an averaged industrialized nation. United State’s total spending on healthcare in 1997 has been accounted to be $3,925 which was 13.5 % of its gross domestic product on healthcare. Between 1990 and 1997, the growth in the US healthcare costs were 4.3 percent per year which was very high as compared to the 3.8 percent median of OECD countries (Heshmat, 2001, p. 67). Finkler (2005) reported that, based on findings of Martin et al- 2002-, the average healthcare spending in the US has grown at an average annual rate of 7 percent, with a range of 4.4 % in Arizona and 9.4 in Texas. These variations are attributed to patent demographics, socio-economic characteristics, concentration of healthcare resources, both Federal and State spending policies and various other market factors too (p. 29). Why is Healthcare in the US very expensive? Major factors that led high cost of healthcare in the US are change in per-capita income, aging population, tax treatment of health insurance and advanced technology that made tremendous changes in healthcare industry. People with high income are found to spend more on healthcare in almost all countries and this has been a major factor in the US as well. Health and medical services are economically considered to be a normal good that people demand more as their income increases (Heshmat, 2001, p. 70). As New York Times (2007) wrote that neither aging population nor high cost of prescription drugs are the major reasons for increased healthcare costs in the US, but rather increasing healthcare cost has been mainly driven by the income of its people. Medical malpractices have been litigated and various advanced machines have been introduced, but these have relatively minor roles in increasing the healthcare cost. People in the US are willing to spend more on healthcare as their spending on most other things also have been increased. US is richer than all other countries and its people are spending relatively more. As income increases and as a result people’s spending too increases, the prices of the goods or services will tend to increase. Perhaps, most deep routed reason is high income of Americans who are willing to spend on healthcare more than other countries’ population do and this cause high demand on depending on various machines on healthcare industry like M.R.I scan, laparoscopy etc. US population depend more on costly specialists and therefore they cause high demand for advanced technology as well as costly machines (New York Times, 2007). Lemco (1994) found that healthcare costs in the US have been dramatically increasing since 1970, and this growth has accelerated 60% faster than the rate of inflation. The major factors that caused this greater increase in healthcare costs include general inflation, aging population, increased patients’ demand, increasing physicians supply, implementation of inappropriate care, use of defensive medicine, dependence of technology and increased use of expensive new machines (p. 18). Aging population has been found to be a major cause for increased healthcare costs in the US. Gwartney, Stroup and Sobel (2008) stressed that number of Americans with age 70 and over will is expected to be expanding by 7.4 million between 1995 and 2015, being accounted a 31 percent increase. This huge increase in elderly American population has enormous impacts on the total spending for healthcare and it will be directly impacting the healthcare industry as well (p. 696). It is because, the healthcare spending for elder population is much higher than others who are below seventy and so on. An increase in aging population will cause proportionate increase in the demand for healthcare services. As demand increases, the healthcare services will be priced high and thus it may increase total spending on the services. Personal medical care expenses have been increasing in the US since 1970. More specifically, increase in medical spending was associated with increasing number of older population. Heshmat (2001) emphasized that the problem of increased medical care costs in the US was a result of generous tax treatments of employer-paid premiums. Employment-based insurance has gained considerable tax subsidy due to the exclusion from income taxes and Social Security payroll deductions. This subsidy has in turn encouraged employees to demand more of their compensation in forms of health insurance which in turn increased demand for healthcare (p. 70). Technological change is more evident and rather a very direct reason as many researchers found that rising healthcare spending in the US has also been driven by new diagnostics and new treatment procedures. Technological advances including introduction of new drug, new surgical procedure or innovative diagnostic technique considerably affect the total expenditures for the healthcare. Development, refinement and diffusion of these technologies cause huge investments and in turn on increased spending on medical care (Heshmat, 2001, p. 71). A very significant factor that influences the high cost of healthcare is its administrative expenses. The current healthcare system has resulted in administration costs that are extraordinarily high, especially when compared to other countries. As Porter and Teisberg (2006) stressed, the administration costs become high burden in the healthcare industry, in all types of healthcare delivery, with apparently little benefits on the quality of medical services a customer receives. Some surveys reported that both physicians and nurses spend around one third or approximately half of their time on paperwork (p. 29). Effects of Healthcare Pricing on the poor in the US High cost for any necessary goods and services are generally unaffordable to the poor. When it comes to the healthcare costs in the US, it is becoming extremely expensive to poor to get easy access to the services and this may adversely impact on the economy as a whole. Poor are more likely to be in greater need of healthcare services as compared to richer, but they are more likely to be deprived of the services due to high costs. Angel, Lein and Henrici (2006) opinioned that poverty in the United States, mainly for minority children, is very high as compared to many other developed nations. Poverty is very evident and its potential impact on health is perhaps more disturbing. Those who are lowest in the income distribution, more specifically those who are very poor, make only 34 to 38 percent of the medium US income (p. 42). Many researchers reported that Americans are generally dissatisfied with the healthcare system and this dissatisfaction is mainly rooted in the high cost of healthcare, lack of universal access and lack of demonstrated gains in life expectancy (McCarthy and Schafermeyer, 2004, p. 649). As Porter and Teisberg (2006) stated, US healthcare costs very high and therefore US could not enable greater access to medical care than else where. In 2000 alone, there were 39.8 million Americans who have been without healthcare coverage, and this was around 45.8 million in 2004 (p. 17). US healthcare consumers are found to be highly dissatisfied with high costs of healthcare services than do customers in other countries. Poor are generally in greater need of better healthcare system. Many countries facilitate easy and free access for poor people to medical services in order to ensure that they get quality medicines and treatment. When it comes to US, there are large number of poor who are, due to the rising costs of healthcare, often deprived of medical services. Rich people get easy access to expensive treatment with advanced technology whereas poor people cannot get an easy access to such medical facilities. As once Kofi Annan, UN secretary General stated in an address to the 2001 World Assembly, the biggest enemy of health in the developing world is poverty. Poverty is associated with malnutrition, indoor or outdoor air pollution, hazardous working environment, lack of access to healthcare, lack of better working condition, unsafe or less sanitation etc (Mooney, Knox and Schacht, 2008, p. 50). Poor people face a number of problems including less access to proper healthcare services, and when healthcare costs become very high, poor people are most likely not get any way access to quality medical services. In the US, low socio-economic status is associated with major health issues like diseases, deaths and long-lasting disabilities etc. A majority of those who are below poverty line are found to be disabled. Poverty in the US is also associated with higher rates of health-risk behaviors like smoking, alcohol use, over weight etc. poor people are more exposed to health and environmental hazards (Mooney, Knox and Schacht, 2008, p. 50). Rising cost of healthcare is largely influenced by changes in population demography. As far as Americans’ age is considered, more expensive and intensive healthcare is required. Poor people have been found very different in their life style choices like smoking, alcohol consumption, obesity, lack of exercise, indiscriminate sexual practices etc. These lifestyle choices directly or indirectly contribute to the increase of many diseases like lung cancer, heart diseases, diabetes, asthma, AIDS etc. Poor people thus have more vulnerability and exposure to greater risks of diseases, but, less access to proper medical care due to high-costs makes more troubles on them. Many poor remain uninsured which in turn cause an increase in the costs of healthcare (McEwen, 2002, p. 99). Poor in the US are less likely to have easy access to proper medical care and this shows how different is equality of opportunity between rich and poor population. Americans value equality of opportunity at all levels and same time they reject equality of outcomes. Angel, Lein and Henrici (2006) argued that equality of opportunity and equality of outcomes becomes a myth when analyzing the nature of work and systems of social satisfaction (p. 44). Healthcare expenses increase the risk of premature birth and life-long impairments for poor people. In order to bring healthcare costs down, a number of different approaches have been developed. An effective approach to reduce costs and bring effective medical care services is ‘managed care’. Managed care is an organization that takes active role in limiting the healthcare providers from what and all their patients can use. They use financial incentives to limit utilization (Heshmat, 2001, p. 74). Before managed care came in to existence, physicians acting individually on behalf of their patients, decided how healthcare dollars are to be spent. These doctors billed for their services and third-party insurers reimbursed them. These physicians billed them on fee schedule or usual customary fees. But, recently, many employers, due to managed care, changed from passive payers to aggressive purchasers and they are having more influence on payment rates (Heshmat, 2001, p. 74). This shows that managed care can bring greater efficiencies in reducing the risks associated with higher pricing of healthcare and its impacts on poor people. Conclusion This piece of paper has presented a brief literature review on healthcare pricing and its impacts on poor people in the US. The healthcare costs in the US has been dramatically increasing causing major challenges on poor people. Increased costs of healthcare in the US are driven mainly by growing wealth of the people, technological change, aging population etc. demand for quality medical services has been growing, mainly from poor people, but they remained far from easy access to proper healthcare services due to high spending required for the services. References Angel, R, Lein, L, and Henrici, J, (2006), Poor families in America's health care crisis, Illustrated edition, Cambridge University Press, Finkler, M. D, (2005), Healthcare cost differences in the 1990s: the influence of metropolitan area marketplace dynamics, Research in healthcare financial management, isRHFM, Ltd. Gwartney, J.D, Stroup, R.L and Sobel, R.S, (2008), Economics: Private and Public Choice, Twelfth Illustrated edition, Cengage Learning Heshmat, S, (2001), An Overview of Managerial Economics in the Health Care System, Illustrated edition, Cengage Learning Lemco, J, (1994), National health care: lessons for the United States and Canada, Illustrated edition, University of Michigan Press McCarthy, R. L and Schafermeyer, K.W (2004), Introduction to health care delivery: a primer for pharmacists, Third illustrated edition, Jones & Bartlett Learning McEwen, M (2002), Community-based nursing: an introduction, Second edition, Elsevier Health Sciences Mooney, L. 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