Industrial Psychology Essay

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Healthcare

Contemporary Issues in Health Care

There are several factors that are driving up the cost of health care in the United States. Rising drug costs are a major factor in the marketplace. A PriceWaterhouse Coopers (2014) study showed that new drugs in particular are a driver of cost increases in the health care system. New drugs come with monopoly protections, and drug companies use this to extract monopoly rents on their customers to recoup the high cost of new drug development. The use of new drugs over older, generic drugs that perform the same function drives up the total cost of health care.

Another major cost driver that has been identified for health care is a shift in where health care is performed -- for example hospitals charge more for the same care in an outpatient setting than physician offices charge. A move towards more health care delivered at hospitals is spurring higher costs (PWC, 2014).

A third factor, taking a strictly economic look at the issue, is information asymmetry combined with low price elasticity of demand. In essence, consumers demand a high standard of health care, and are typically willing to pay a lot of money to have this, because of the negative consequences of inadequate care on the length and quality of their lives.

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This gives the industry low price elasticity of demand. The insurance company as an intermediary, as long as it is able to pass on its costs to the payers, only makes this worse, creating a barrier between provider and payer, and taking a profit on this intermediary function. This combines with information asymmetry -- the payer knows almost nothing about the actual costs of the health care services they are receiving. It is at the point where a hospital can charge exorbitant prices for just about anything. If the intermediary (the insurance company, which might have better information) does not challenge the charges, the payer (the insured person or their employer) has to pay. Yet these end payers have very little information, and providers exploit this information asymmetry to charge rates that could not exist under conditions of perfect competition. A functioning, open market depends on payers having a high level of information, especially when they have low price sensitivity. That basic condition for cost control simply does not exist in a meaningful way in the health care industry.

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