Free Healthcare Economics Essay Sample

In the United States, a portion of healthcare is market based, that is, health costs are paid for by individuals and employers. However, medical care to vulnerable people is provided by the government, with Medicare providing health insurance to the elderly people and the disabled, while Medicaid covers the low-income groups.  The government funds Medicare through medical payroll tax, premiums from beneficiaries, general revenue, primarily federal income taxes, taxes on social security, and through deductibles, and coinsurance. Medicare in the United States is financed through two funds held by the US treasury:

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1. The hospital insurance which covers:

 Medicare Part A covering inpatient services, nursing services, hospice care, as well as administrative costs which include costs related to paying of benefits, collection of Medicare taxes, and costs related to fraud and abuse.

2. Supplementary medical insurance – Medicare Part B (medical insurance) benefits, such as physician services, outpatient care, medical equipment, certain preventive services, and lab tests.

3. Medicare Part D (prescription drug benefits). It is sponsored with the funds authorized by Congress, premiums from people enrolled in Part B and Part D, and interests earned on the trust fund investments.

The growing cost of medical care poses a financial burden on both the beneficiary and exchequer beneficiary. In 2010, for example, premiums for Parts C and D equaled 12% of the average social security fund, while the cost sharing amounted to another 18% on the social security benefit that is not increasing. The American government has one of the highest costs when it comes to health care production in other developed countries, where in 2004 the government spent 6,280 dollars per capita, which is twice the average amount spent by other developed nations. This is an unreasonably high amount, given that some reports show that there has not been a subsequent increase in the quality of life in some states. 

Since the 1970’s, Medicare costs have always grown faster than the economy by an average of 2.5%. This may be attributed to:

  • Advent of new technology without proper information on clinical outcomes or cost efficiency acting as a guide on adoption and use. 
  • The increasing prevalence of chronic diseases.
  • The consolidation of insurers, providers, and the health industry including pharmaceutical companies, device manufacturers, and other suppliers contributing to narrower choice and higher prices, such as are the case with health maintenance organizations (HMO) which are expensive due to their increased market power.

The rapidly increasing Medicare costs in the federal budget may be seen as failing of the Medicare system or a crisis waiting to happen. One way of measuring the soundness of the Medicare product is to analyze its portion of the GDP, where it currently stands at 2.5%. The Congressional Budget Office estimates that even the net beneficiary premiums outlay, considered as the portion of GDP and Medicare will reach 6%.

Another notable sign of success of the Medicare fund is the Medicare solvency trigger. Medicare Trustees are required to estimate, using a particular formula, a ratio measuring the extent to which the program expenditures exceed the dedicated revenue, if the ratio is expected to exceed 45 percent within seven years, a determination of “excess general revenue funding” is made. If the determination is made for a second consecutive year, a “Medicare funding warning” is issued by the Trustees. The potential steps to limit the ratio to no more than 45 percent include raising revenue by increasing Medicare payroll taxes, beneficiary premiums, taxes on Social Security benefits; or lowering spending by reducing benefits or payments to providers. Increasing general revenue contributions would not improve the ratio, except if policy makers decide that the increased general revenue funding is an appropriate means of financing Medicare. However, the funding warning has been criticized on a number of grounds. Key among them is that the formula promotes certain policy solutions over others. Therefore, Congress must come up with proper legislations to save the Medicare system.

Health is like any other commodity in the market and is thus faced with the problem of scarcity. Therefore, key decisions have to be made in its allocation. In the last 40 years, the demand for health in America has increased due to reasons such as the composition of age structure and improvement in technology. To exemplify the latter, in the early 90s, many prescription drugs were introduced as well as the kidney dialysis machine, that has stopped people from dying of kidney failure. An increase in real incomes caused many people to discontinue living in pain. For example, an elderly person who suffers from mild osteoarthritis of the knee would rather have a surgery than give up the usual rounds of golf. Scarcity of a commodity is created by the infinite number of human wants and the limited nature of the resources available. The government then needs to allocate the resources in the Pareto efficient manner.

Pareto efficiency refers to the allocation of resources, such that it is impossible to change that allocation without making a person better off and another worse off. The only way the society can increase treatment by increasing the output of the factors of production. Allocation is done depending on whether it is a free market system, where resources may be allocated on the basis of consumer’s purchasing behavior. Market-based healthcare then tends to act as a safety net to offer universal healthcare to people who cannot afford private insurance, such as the elderly and the poor. The command system uses some pre-determined criteria, such as need or mixed system, which borrows elements from both types of systems. Whichever system that society must choose must be Pareto efficient as well as equitable. However, there are two types of equity

Horizontal equity occurs where the health care system must give two people with the same complaint equal treatment. Vertical equity stipulates that two citizens who are unequal must be treated differently. In health care, it can be reflected by more treatment for those with serious complaints than those with trivial complaints, or by basing the finance allocation on the ability to pay.

From the above, it is evident that Medicare is a system that may achieve all that is desired of a health care system. There may be much discontent among the elderly who may perceive this as an insurance system instead of a welfare system because of the payment of premiums and the fact that it only covers part of the costs, as is the case with insurance policies. Health is a very expensive good to provide, and that is one of the main reasons, as indicated by the government, due to a large startup capital required and the sensitivity of the service. In addition, it is also the onus of the administration to provide other services to people, such as security, infrastructure, and other public goods. The government cannot shoulder the entire responsibility in terms of costs, as that will lead to budget cuts in other sectors of the economy that are equally important, hence the need for premiums. Due to the complexity involved with providing public goods, the equality with which they are offered is measured by ensuring that the government operates at a Pareto efficient allocation. There are two principal ways to achieve savings and efficiency:

  • To create approaches that will yield improvement in value for current levels of investment in care.
  • By slowing down the rate of increase in health care costs and to ensure that increased investments result in increased value

The government should continue to provide the elderly with healthcare, because they have an obligation to do so to their citizens and thus should adopt strategies that reduce costs such as:

  1. Information is a key element in the purchase of any good, and health is not exempted. The government should improve access to information on the quality and the costs of care, which will, in the long run, improve effectiveness of the health care program as well as expose customers to a wide range of services to choose from.
  2. Reduction of insurance overheads, thus achieving more competitive prices, which would be welcomed by the elderly folks who are on fixed income, since any good priced competitively leads to lower prices.
  3. Promote efficient and effective care by providing payment incentives.
  4. When dealing with the elderly, a health care system that is more patient-centered would be highly appreciated, as this demography enjoys such services.
  5. Investing in health information technology infrastructure and exchange systems, which would improve access and equity.

Increased effectiveness can also be achieved through value-based plans. Recently, there have been various private and public initiatives to improve quality by holding physicians and hospitals accountable through performance reporting and pay-for-performance incentives, that is “value-based purchasing”. With this method, the underuse of preventive effective care for patients with acute conditions or chronic diseases is eliminated. The underuse of any other aspect also shows that a system is not operating at Pareto efficiency.  In addition, deductibles lead patients to forego preventive care or chronic disease management, which is expensive in the long run. Several studies have found that high cost sharing may lead low-income households to forego essential medical care.

Consequently, avoidable complications for those with chronic diseases lead to higher total costs of care from the increased use of emergency rooms and hospitals. “Value-driven” health benefit designs and tax policies that support such designs could better align patient and provider incentives. This could be done by amending the tax incentives where primary and preventive care is excluded from deductibles and done by public reporting of data on quality. Recent studies have shown that the policies that engage providers and patients do not only encourage the shared decision-making between patients and providers, but also lead to better patient outcomes in addition to being cost effective. This should be coupled with hospice care, terminal illness services, available alternative treatment, and the pros and cons associated with each choice.  Adopting a value-based approach, taking in line patient and physician incentives will lead to an equitable and efficient healthcare system. Armed with all the above, a potential patient will make an informed choice on his source of healthcare services that will be efficient, convenient, and have value for money.


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