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American Healthcare Market: A Very Tilted Scale

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In 2011, USA’s health expenditure reached 17.7 % of GDP, that’s two-and-a-half times more than the OECD average. Evidence suggests that prices for health services are substantially higher in the United States than elsewhere. Figuring out why is not that simple.

A simplistic supply-demand approach would tell us that prices are higher because demand is higher – Americans want more healthcare – or because supply is limited. Or both. In any case equilibrium is reached. However, we should be careful with oversimplifications. The market for healthcare is extremely complex and very different across countries.

First, one should note the presence of a third agent, the health insurer. While the public National Health System (NHS) covers all citizens in the UK, private health-insurance firms have a huge role in the American health care market.

Now, let us consider how inelastic the demand for healthcare is. People will do almost anything to keep themselves and their loved ones healthy. From a competitive market point of view this doesn’t represent a problem, all it means is that equilibrium price will turn out to be very high. However, if we take equity concerns into consideration this inelasticity is reason for alarm. It is a potential goldmine for suppliers and can create a lot of problems for consumers.

While governments and non-profit hospitals may not have profit-maximization as their primary goal, a lot of other health care providers and private insurance firms, do, and they have a lot of market power in the US. They can push prices of medical procedures up, sometimes to astronomical amounts, and people will still buy them.

To aggravate this, there is a considerable information asymmetry between consumers and suppliers/insurance companies. Many times patients are unsure of what their preferences are to begin with. Furthermore, consumers of healthcare tend to deeply trust health care providers, assuming that the supply side is motivated to act in their best interests but that is not necessarily the case. Interestingly, this is not a common assumption for most markets. So, for example, people’s perceptions of how much they need certain treatments can be easily manipulated. Also, it is important to remember that once a patient is admitted to a hospital she can easily end up consuming healthcare without knowing what the final price will be, as costs for exams and procedures quickly pile up. The private market for doctors and insurers has lobbied for decades to hide details on doctors’ performances and prices.

In a place like the United Kingdom, government has a very direct influence on prices, as they are deeply shaped by negotiations between public hospitals, doctors and pharmaceuticals. In some cases the government sets prices for certain procedures or for pharmaceutical products. Even with some distortions, the American market might be closer to market equilibrium than the British one. Whether this is a good or a bad thing falls out of the economics spectrum.

Personally I have some reservations about letting the health care market run freely. Let’s just say that under the veil of ignorance I would much rather be sick in the UK. Despite some positive changes brought by the Affordable Care Act, being chronically ill and relatively poor in the US is still no American Dream.

Margarida Anselmo, 715

General reference:
Microeconomics: Theory Through Applications, v. 1.0 by Russell Cooper and A. Andrew John

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Author: studentnovasbe

Master student in Nova Sbe

One thought on “American Healthcare Market: A Very Tilted Scale

  1. so, how much of it will change with Obamacare?