Why is Health Insurance so Expensive

With medical expenses in America equivalent to 15.3 % verses 11.6% in Switzerland, 9.9 % in Canada, and 8.3% in the United Kingdom (figures are from OECD Health Data, 2006), it is clear the Americans receive a significantly lower income to value ratio for health-care than other nations.

The fact that Americans have a higher income than other nations does not explain the higher expenditures. Although Health Care systems in all countries are complex interactions involving government and private industry programs, in the US, federal and State programs are major payers of health-care costs through Medicare for the elderly and Medicaid for low-income families.

Many Americans feel that excellent health care should be a birthright for all whereas, purchasing items such as a hamburger or computer relies on the individual being able to afford such items with no one really seeming to mind if these items remain outside the realm of affordability to certain individuals within the system.

Decisions about health care in America are the result of interactions between individual consumers, health-care providers, and private health care insurers as well as the government. Economists view the result of decisions regarding health care as beneficial so long as the results of marginal decisions remain equivalent to their marginal costs. However, the health care industry differs significantly from other industries in terms of perfect competition.

Observers offer explanations ranging from a younger generation of Americans more conscious of health and wholesome living choosing to spend a larger share of income on healthcare. Others suggest that the ever growing amount of Americans who are overweight and even obese fall victim to physical disorders and afflictions requiring additional medical attention. Some observers hold the endless stream of medical innovations responsible for rising health-care costs.

A young economics professor at the Massachusetts Institute of Technology challenges the conventional wisdom. Amy N. Finkelstein concludes that the culprit for rapidly increasing health-care costs is the massive expansion of medical insurance over the past forty years. She feels the reason that technological innovations such as new drugs and microsurgical instruments play a role is due to the fact that doctors, hospitals, and consumers adopt these new innovations largely because insurance companies foot the bill.

Finkelstein believes that the reason consumers opt for more care is due to someone else footing the bill. Also figuring into the equation is hospitals and other health providers rely on the steady source of revenue insurance provider’s guarantee. Amy Finkelstein’s conjecture confirms a theory advanced nearly thirty years ago by a Harvard economist named Martin Feldstein. At that time, he did not have the detailed health cost data available to back up his claim.

Without the necessary proof, Feldstein’s theory remained unnoticed until Finkelstein discovered the proof researching data in MIT’s library. She discovered that hospital spending soared as a result of the federal Medicare program began in 1966. Finkelstein discovered regions such as the south where most seniors had no insurance, health spending increased significantly. In areas like New England where most people had health-care coverage, Medicare had much less impact. Although not everyone buys into her theories, she has prompted many to re-examine long held views related to the factors that affect health-care costs.

Health care premiums have increased 77% over the last five years, more than 2.8 times the rate of medical inflation. This inflationary deceleration along with recent economic expansion may become a catalyst for positive change in the health insurance marketplace.