27 Oct 2009

US healthcare and unrestrained demand

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.

Siu Lai Chow says:

Healthcare cost tops 2.5 Trillion dollars this year in the USA. With a population of 305 million people, that is $8,200 per person. In SF Bay Area, one of the wealthiest areas in the country has a maiden Per Capital Income of $36,800. If the healthcare cost is outrages to us, it is just more so when apply to the rest of the country.

Can you can image spend $8,000 dollars at your visit to a doctor? Is it worth the cost? Of course we have insurance, but somewhere someone including us is paying for the $8,000. Insurance is a system for everyone pays a little more, so the few needed more don’t have to pay entirely by themselves. It is no different from going to restaurant with a group of people and just simple split the check. Someone order an expensive item has a benefit at the cost of their friends each pay a little bit more. When it is with friend we are Okay with this. But most of the other members in the insurance system are not. With an average Insurance cost at $3,000 per year, plus the matching cost of employers to the insurance plan. With price so high already it is not too hard to see people have a tendency to make the visit to a healthcare facility worth cost they already paid, by order the best medicine money can buy and the most costly check up and treatment insurance can pay. Healthcare carrier has no problem with this as long as the insurance company pays; drug and medical equipment company enjoy the additional revenue by higher demand, and Insurance company just increase the premium to everyone. The worst part is no real alternative to the general public. In all we end up with a 2.5 Trillion bill and every one of us is the loser to the system. On the top of it we have 40 million American live without insurance.

The under-regulated Insurance system is the reason leads us to this mess. Current system has no incentive to anyone to save cost. It is like there is no constrain in the resource we spend on Healthcare, the demand is of course goes to the roof and so as the cost.

Protecting the country wasteful expenses from health insurance is out-weighting the benefit of the free market policy to protect the insurance companies.

Bottom Line: The solution to our healthcare problem relies on government intervention not the free market competition.

Bay Area Census
US healthcare costs
The Economic Naturalist (by Robert H. Frank) Chapters 5 and 6


  1. I disagree with the assertion that the insurance system is under-regulated. The insurance system and health care deliver systems are highly regulated. As you point out, insurance can have the perverse effect of creating a moral hazzard among the purchasers. This effect is increased when regulations run counter to the ideas of mechanism design. By ignoring the incentives created by the regulations, those regulation often create unintended consequences. As you point out, one consequence of third party payments is the idea that health care has already been paid for and there is no marginal cost for increasing use.

    Bottom line: Economist seek to understand human behvior and incentives. With this knowledge more efficient systems can be designed and the results of law of unintended consequences can be reduced. (Politicians just hate this.)

  2. Third party payers are the root cause of this mess, indeed. That seems to me to be the issue to debate. Looking at insurance behavior or other behavior and addressing that is just appeasing the symptoms of a broken system.


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