8 May 2017

Making the healthcare system great again

Ana writes:*

Waste is one of the leading issues in the healthcare system of the United States. How is the United States one of the top spenders in healthcare but have one of the highest mortality rates amongst developed nations? Where is this money going to? Statistics show that for every dollar spent on medical care, thirty cents are wasted which results in 750 billion dollars [pdf] wasted on health annually in the U.S. These costs include excessive administrative costs, unnecessary services, increased prices and medical fraud. Moreover, basic medical gear such as a liter of normal saline reaches 546 dollars but its cost of production is 44 cents [pdf]. However, after the product is made and before it reaches the hospital, it passes through various middlemen. However, no one fully understands exactly how the price of this product is determined [pdf]. Even though U.S. citizens pay 1.5 times more for health than any other taxpayer in the world, the country is still ranked 50th in life expectancy and 47th in child mortality. It is clear that in this situation, the costliness of the system does not lead to a higher quality. The U.S. healthcare system is still falling short in
quality, results and equity [pdf]

Fraud is very common in the medical sector in the U.S., pharmaceutical companies being one of the most corrupt actors in this business that has become the American healthcare system. None of the healthcare system’s actors have strong incentives to economize the system since they are benefitting more from charging excessive amounts for products. This implies that the healthcare system’s actors are unmotivated to economize the system, since they are currently profiting highly from it. Doctors are another important key actor in this medical fraud. They do not impose the concept of rationing when they assign treatments to their patients [pdf]. This in combination with the uncertainties that result from insurance policies result in overscreening and overtreatment of patients Health insurers also play an important role in contributing to the overpriced health system. They take a long time to reimburse health care spending to the citizens which eventually results in customers having to pay higher premiums a month for their insurance.

As shown by the image at right, fraud is not the only aspect of the healthcare system that leads to waste. The waste resulting from inefficient clinical practices that been constantly implemented in the health sector, the elaborate administrative process that is associated with medical insurances and the excessive prices of products sold to consumers have also been drivers of the healthcare sector’s waste. This waste results from both the supply and demand side of the healthcare system. On the supply side, providers of the good are not paid in terms of the efficiency of their services, therefore, they have no incentive to charge people based on the effectiveness of their treatments. This increases the product’s prices drastically for consumers. Moreover, asymmetric information dominates the demand side, which implies that consumers do not have enough information to purchase appropriate healthcare for their budgets.

Bottom line: The key actors in the American healthcare system do not have an incentive to break the vicious cycle that has formed, that will lead to its self destruction, as waste from the different sectors has been increasing throughout the years. It is a system with a large gap between price and quality of its services.

* Please comment on these posts by students in my growth & development economics course. It really helps if you highlight unclear analysis, alternative perspectives, better data, etc.

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