The Cost of Rising Medical Expenses

The Cost of Rising Medical Expenses

        Medical costs have been rising consistently over the last two decades. Data available from BLS shows that not only was the gap between the price of all goods (that includes medical expenses) and medical expenses high in the 1980s but that the gap has been growing. The attached file shows the trend of price index of all goods, and that of medical expenses. As we can see the gap has increased over the last two decades. Not only have medical expenses been rising, but they have been rising at a faster clip as can be seen from the inflation graph: medical inflation has consistently been higher than that of other goods. This poses serious problems for the common people.

        The problem stems from one simple fact: medical services are a necessity people will get them even if the prices shoot through the roof. This has major consequences for our overall economic health. To see how let us take the standard economic analysis that the economists undertake: one using indifference curves and budget lines. Everyone tries to maximize his or her benefit given the constraints they face. People want to consume everything, but they cannot, given their incomes, and hence they have to make choices. This gives rise to what are called convex indifference curves: people are assumed to be indifferent between consuming any two bundles on the line. The want to consume more of every good, hence the further the curve moves out the better it is for consumers. But, they can only go as far as their budget allows, and hence economists assume that people will go to the farthest curve reachable using their income. This is shown using the following graph:

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What the graph shows is this: there is some consumer who is on the curve that is on the outside. He consumes at a certain point shown as A on the curve. There he consumes an amount M of medical services and AG1 of other goods. When medical services become costly he will have to cut down on spending on other goods, since he does not have enough money to buy the same amount of medical and other goods. Since medical services are essential he cannot say he will take less medication, and therefore is left with no choice but to reduce consumption of other goods. He moves from the point A on the graph to B, reducing his other expenses from AG1 to AG2. The only reason for the transition was that medical services became costlier.

        This has consequences for other sectors since if people lower their consumption of other goods other sectors of the economy will lose markets, and that will lead to closure of some industries while others reduce their size. This will further hurt the consuming power of the people who lost their jobs, and hence will further lower consumption of other goods. This cycle will lower our total output and hurt our economic well being.

        Therefore, there is a need for controlling escalating prices in the medical services. To do that one has to look at the root cause of why this is happening. Medical school is costly and can easily cost over $200000 for every student. The government will have to find a way to bring down this cost: a lower cost in school will mean doctors will have lower salary expectations and demands. We also need to increase the number of hospitals and provide incentives for students to opt for medical field. Another aspect that needs to be addressed is that of consumer law pertaining to medicine. Doctors may make genuine mistakes that the lawyers will paint as gross negligence and sue them. To cope with this doctors have to go for very costly malpractice insurance which they then add on to the cost of providing their services. There is also the need to modify the medical insurance industry and make it more competitive. All these steps will lower the cost of setting up the infrastructure, and hence of providing medical service.