Question

1. A newspaper columnist, writing about the US health care system, concluded: "US health care costs are rising so rapidly because a much larger percentage of Americans now have health insurance to pay for their medical bills. The increase in health insurance coverage in the US resulted in a decline in out of pocket spending by individuals from roughly 65 percent to roughly 20 percent from 1950 to 2016. This change led to a 500 percent increase in real per capita health care spending from 1950 to 2016."   

1. Your boss, Holly Hopeless, reads this article and is totally confused. She does not understand how insurance could possibly lead to the effects described. Holly wonders whether market forces affect health care spending at all in the way described. She knows though that you have been learning about the effect of health insurance on demand for medical care. Explain to Holly how insurance could lead to the effect described in the article. You can use graphs or data to illustrate your story.
2. You recently told Holly that the demand for medical care is relatively inelastic, because you have learned this. So if this is the case, she asks how much of the 500 percent increase in spending is explained by increased health insurance coverage? Explain this conceptually or using the data in the problem if you wish. [Hint: the fall in the share of spending paid by individuals is equivalent to a 70% decline in price.]
3. Holly asks if health care costs have risen primarily because of induced demand resulting from increased health insurance coverage or if there are other reasons for the increase? List and describe at least three other factors that might account for the increase in real per capita health care costs.

Answer 1

a. as health insurance became available, the people perceive/know that the companies are going to pay for their health expenses. hence people are now more likely to take a treatment when they are given an option than before hence the demand for healthcare services had gone up. this is how the per capita healthcare expenditure has gone up now.

Demand before supply of medical care price & cost demand for medical care after the insurance coverage Q* 5Q* quanitity of healthcare provided/expenditure

b. as the demand for healthcare is more inelastic, as the person's who have to pay less now may not demand that much more amount of health care. Think like this way, just because the healthcare is cheaper, you may not go to the hospital asking for a kidney transplant if you don't have any health problem in the first place. if this is the case, then a very little amount of the increase in the healthcare expenditure will be explained by the change in the insurance cover.

c. other factors leading to the rise in healthcare expenditure may be:

1. more expensive healthcare system: if the price of healthcare goes up the total expenditure of the healthcare will also go up.

2. Diagnosis of the diseases improved hence health problems are detected more in frequency and hence people seek more medical care.

3. Ageing of the population: if the population in the older bracket goes up more rapidly than the young people(due to population control policies) then healthcare cost will go up as the old people require it more and as the population goes down the per capita expenditure figure may go up.

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