Supply and Demand

Research questions

1. Is healthcare different from other goods and services?

2. What is the role of supply and demand factors in increasing the cost of healthcare?

3. What are the solutions to these problems?

Question 1

Health care is different from other services in various ways. The first difference is in the output. The outputs of the health care sector are less well defined. For example, the output of a clothes factory is clothes. The output in healthcare is imperfectly understood and unpredictable.  Additionally, government intervention and third-party payment are pervasive. While none of these characteristics is distinctive to health care, their interaction and extent are unique to healthcare.

The final output of medical care is its impacts on health. The impact can only be assigned probabilities before the care is provided. Even after provision, it is difficult to measure as medical care is not the single determinant of health. Others include exercise, nutrition and other lifestyle factor. Efficient allocation of public and private budgets to health involves equating marginal cost and marginal benefit for each of these inputs. Nonetheless, health care markets comply with the fundamental rules of economics.

Question 2

The Healthcare cost as a percent of Gross National Product has grown more rapidly in the United States compared to other countries (Thorpe, 2005). The increased cost has become a major topic in public debate. How much value consumers get for these expenditures and whether the State should further intervene to control costs is a concern. The increase can be categorized into three components: increases in the volume of services, medical price increases and increases in the intensity of resource use.

Intensity is reflected by changing technology, quality and other elements that make any medical service more resource-intensive than it was in the past. Technology is a significant factor in driving cost. A standard economist's presupposition is that technology is not adopted unless it produces greater benefits in relation to costs (Chandra & Skinner, 2012). This does not always apply to new medical technologies. This is because substantial government subsidies through tax subsidy to private health insurance and tax-funded government insurance programs cause medical providers to adopt technology that consumers may value less compared to the cost.

Another factor with an effect on demand and supply of healthcare is risk and insurance. Naturally, the risk of illness leads more individuals to demand health insurance. But the demand for health insurance in the United States is distorted by the reality that employer contributions are treated as tax-exempt compensation to employees. This means that there is an open-ended subsidy at the employee's marginal tax rate, such as payroll and income taxes at the State and federal levels. The "tax expenditure," does not appear in the government budget. Assuming a marginal tax rate of 33%, the subsidy more than covers the administrative cost built into insurance premiums. As a result, an average employee would consider insuring even routine medical services.

Third-party payments have increased dramatically. These affect the cost, structure, quantity and quality of healthcare services offered (Baicker & Goldman, 2011). Given that insurance firms pay a significant percent of the cost of medical care, the insured consumer's point-of-purchase price is essentially lower. If a healthcare provider charges thirty dollars and the insurance firm pays 80 percent, for example, the consumer's price is only six dollars. Accordingly, the quantity demanded increases when the price falls as in any market.

Asymmetric information in the healthcare market also affects the demand and supply of healthcare.  Consumers, in general, have less information compared to providers concerning the costs and benefits of alternative treatments. This means that consumers significantly rely on healthcare providers for treatment and advice. Such mixed roles are more complex in medical care since the provider is an agent for individual patients as well as third-party payer, who in turn, is the final agent for patients with policies. Every patient desires to consume any service that with benefit particularly if the out-of-pocket cost is zero. This increases the demand for medical services.

Question 3

Reducing the increased cost of healthcare spending is a fragile balance that requires both producers and consumers to be equally motivated to do so.  This requires the health care delivery system to spend less in order to achieve a higher aggregate saving. Government intervention is important in swaying the factors of demand and supply. The State plays many roles including purchaser and regulator (Folland et al., 2007). Government intervention should typically address access or either quality.  In markets with the infrequent purchase and asymmetric information, regulations can assure minimum quality and enhance efficiency. Often, regulation is in the form of licensing, which limits competition by limiting entry. This can also be done by reducing funding coverage for employees and beneficiaries.

This means that insured people have observed and unobserved characteristics that are associated with high demand for medical care.  This will affect the demand for health care and reduce the cost that the government shoulders by affecting the Patterns of healthcare utilization. On the other hand, Providers will consequently experience financial pressures, particularly as reimbursement decrease.  As a result, they will be pressured to do more for less.

References

Baicker, K., & Goldman, D. (2011). Patient cost-sharing and healthcare spending growth. The Journal of Economic Perspectives, 25(2), 47-68.

Chandra, A., & Skinner, J. (2012). Technology growth and expenditure growth in health care. Journal of Economic Literature, 50(3), 645-680.

Folland, S., Goodman, A. C., & Stano, M. (2007). The economics of health and health care (Vol. 6). New Jersey: Pearson Prentice Hall.

Thorpe, K. E. (2005). The rise in health care spending and what to do about it. Health Affairs, 24(6), 1436-1445.

Sherry Roberts is the author of this paper. A senior editor at MeldaResearch.Com in college research paper services if you need a similar paper you can place your order for medical essay writing service online.