Vol. 2 No. 2 Specials

To understand the economic forces behind America's skyrocketing healthcare costs, one must first realize that a permanent fix is unrealistic. Healthcare is expensive, and the more that people demand it, the costlier it becomes. Furthermore, healthcare is a victim of its own success: as medical care continues to improve through technological innovation, the country’s sick and elderly will burden the economy with the high price tag of their steadily increasing lifespan. While it is easy for doctors, economists, and politicians to point fingers at one another, with one camp indicting privatized care for its high administrative cost, and with another camp slamming the government for its wasteful subsidies, the real problem and its solution lie somewhere in between these adversarial positions.

The numbers are staggering. According to the National Coalition of Health Care, by 2006, the average family health insurance premium will exceed $14,500, a $5,000 increase in just three years. To put that increase in perspective, consider that in 2003, healthcare spending outpaced inflation by a factor of five. Perhaps most alarmingly, increased spending might not correlate with increased quality. Although the United States spends a greater percentage of its gross domestic product on healthcare than any other major industrialized nation – 14.1 percent in 2001 – the World Health Organization ranked the United States 37th among nations providing quality health care in a 2000 report. Despite spending the most on healthcare, we are not the healthiest country.

But the gap between what we pay and what we receive might not be as great as such figures suggest. The Foundation for Economic Education economist Charles Van Eaton attributes high medical costs to America’s success at treating illnesses that would otherwise have been fatal. Thanks to advanced medical procedures and prescription drugs, more sick people survive than ever before, and so do their medical bills. Even for relatively healthy people, better technology allows doctors to examine patients much more thoroughly (and expensively) than they could fifty years ago. Finally, Americans spend more on healthcare because we have more money to spend. Despite widespread poverty at the lower end of the economic scale, the United States remains a high-income nation. People spend more on most kinds of goods and services as individual income rises, especially healthcare. In fact, Van Eaton asserts, healthcare is especially income-elastic: when consumers’ income rises by a given percentage, their demand for healthcare rises by an even greater proportion.

Others prefer to explain rising healthcare costs by pointing to the astronomical administrative expenses associated with managed care, a system which creates hours of mundane processing and paperwork that doctors must complete so that insurance companies can monitor procedures. Bureaucracy is more than an annoyance for doctors; America's total administrative costs for healthcare total somewhere between $200 and $300 billion a year. Ironically, though designed to prevent waste, administrative processing has overburdened doctors to the point that many payment claims are simple ignored for bureaucratic reasons.