Health Care Economics
November 17, 2010
Tom Flora, PhD
Health Care Economics
Health care costs have risen steadily for years. “Health care expenditures reported in 2008 exceeded $2.3 trillion” (Kaiser Family Foundation, 2010, para 1). This figure reportedly will increase throughout the 21st century unless the government, employers, and consumers can work together to stem this out of control growth.
The history of health care is short but it provides a small view of how the United States made a simple choice of demand and supply through fee-for-service to managed care, PPOs, and other insurers of health care including the federal government. Fee-for-service in ...view middle of the document...
“Demand is defined as the amount of a good or service that consumers are willing and able to purchase” (Hubbard & O’Brien, 2010).
Economists speculate on demand. They speculate how consumers will respond to changes in the market. Economists watch trends in price increase and spending. They watch consumer’s response to changes in cost of health care which involves price elasticity of demand.
The elasticity of demand measures the quantity of services and the cost of services available. For example: If the price of cardiac surgery went from $10,000 to $15,000 and the quantity of cardiac surgeries fall the demand for cardiac surgery is not sensitive to changes in price. This is known as price inelastic. Another example of price elasticity would be eye exams. If the price of eye exams fell by 10% and the quantity of eye exams bought increase by 5% then the demand of eye exams is elastic, (e.g. sensitive to price).
Price elasticity of demand predicts what consumers will spend when price changes. In supply price elasticity there is a positive relationship between cost and quantity supplied.
The relationship in supply and demand price elasticity is not always constant but allows economists to follow consumer’s responsiveness to market variables. Price elasticity of supply is always positive. For example: If prices of eye exams rise it will take time for insurance companies, government, and managed care to react, and accommodate additional health care services. This will lead to...