Health care is one of the fastest growing section of the economy, and differs from other services in various ways (Danzon, 1992). The output of a bakery is bread but the output of the health care industry is less detailed or defined.
The health care industry is changeable and unpredictable, making it less understood by both producers/suppliers and consumers (Danzon, 1992). However, the health care industry still operates within the basic rules of economics, and economical analysis is required in assessing public policy (Danzon, 1992).
The end product of medical care is, of course, health. Probabilities on health can only be applied and quantified before care is actually provided (Danzon, 1992).
The risk and threat of illness usually leads people to require health insurance. In the U.S., the market for health insurance is influenced by the fact that employer contributions are an integral part of employee compensation which is tax-exempt (Danzon, 1992).
Thus, third party payment affects the basic structure of the health care industry (Danzon, 1992).
Because insurance companies pay for a large percentage of medical care, a consumer’s “point-of-purchase” price has to be less. If a physician charges $20 and the insurance company pays for 80% for the charge, then the consumer’s price is on $4
. Like any other market, the quantity demanded goes up when price goes down. It is hard to measure quality of service based on the effect of insurance (Danzon). The presence of a particular government is heavily felt in the health care industry.
In the U.S., the largest health insurer is Medicare or Medicaid (Danzon, 1992).
Increase in Health Care Costs
Health care costs have rapidly increased in recent years, mainly because of fast trends in medical technology (Danzon, 1992). Nevertheless, an effective resource allocation ensures that the medical benefits exceed marginal costs (Danzon, 1992).
Hospitals play a major role in the health care industry (Danzon, 1992). Medicare implemented a “prospective payment system” in 1983, under which hospitals are paid a fixed charge per admission, basing on the diagnosis of a patient. This way, the hospital shoulders the partial cost of all expenses incurred by the patient.
Physicians also play a major role in the health care industry (Danzon, 1992). The actual number of doctors who are active in providing care for patients have more than doubled (Danzon, 1992).
This increase may be attributed to medical schools’ responses to federal subsidies created to multiply the supply of doctors after the entrance of Medicare and Medicaid (Danzon, 1992). In most markets, increases in supply would result in lower prices, and thus, a higher quantity.
However, many doctors have relocated to rural areas that were otherwise unserved. There is a persistent connection between number of doctors per capita, and the prevalence of home-visits and surgical procedures.
Another influence in the Health care industry is pharmaceutical trends. U.S. prescription of drugs grew by 16.9% in 2001 compare to 2000, making the pharma industry a $172 billion industry (Boyle, 2002).