Health Care Costs: Impact Economy on Medical


The United States stands out as the developed nation with the most expensive health care system. In spite of this, the health care delivery system is deeply flawed and unable to provide adequate services to many Americans. For this reason, there have been calls for radical changes to be made in the US health care system. The government has made attempts at making radical changes on the system. The most significant change came in the form of the “Affordable Health care for America Act (HR 3962)” which was signed by President Obama in 2010. While this legislation promises significant changes, it has been the topic of much debate due to some of the inherent issues that it raises. This paper will discuss the impact of health care on the economy and also highlight the advantages and disadvantages of health care legislation. The various forms of insurance available in the US will be talked about and the evolution of American health care revealed.

Impact of Health Care on the Economy of the US

The increasing cost of health care in the US has raised concern since it has considerably outpaced the GDP growth in the country. Catlin et al. (2007) reveal that the GDP share used on health care spending has moved from 12.2% in 1990 to 16% in 2005. This health care spending is projected to move up to 20% of GDP in 2015. Per capita spending on health care in the US is higher than the level of richer countries and as of 2007, it stood at $6,697 per capita (Catlin et al., 2007). Researchers and policymakers are of the opinion that this high level of spending on health care in the US might be detrimental to the country’s economy. The local and Federal governments rely on tax money to finance the health programs that they offer to the citizens. As health care costs increase, the government will be forced to increase taxation in order to meet the health expenses. In addition to this, the government may be required to increase its borrowing to finance health care.

Many businesses in the US offer some form of health insurance cover for their staff and as the health care costs increase, these companies will incur significant costs which might force them to reduce employment, an action that will hurt the economy. Catlin et al. (2007) further reveal that such companies will reduce their investments in the US and opt for other countries where the cost of operations may be lower. To finance the program, the landmark health legislation necessitates an increase in taxation on businesses and labor. Schansberg (2011) notes that such a move is detrimental to the recovery of the economy which is still trying to pull through the impacts of the severe recession.

Rising health care costs also have implications on the general economy of the country since they are likely to fuel inflation. When inflation is prevalent, the goods and services offered by the US on the international market will be less competitive and this will eventually result in higher product prices. This will deter economic growth in the country as other nations will be able to keep their prices low and hence have a competitive advantage over the US. As such while the links between health care spending and the economy are not straightforward, it is clear that the rapid growth in health care spending is harming the US economy.

Impacts of the Affordable Health Care for America Act

The “Affordable Health Care for American Act” was passed by the House in November 2009 and it aimed to expand health care coverage and improve health care provision for all Americans. One of the factors that are impacted by this legislation is insurance coverage. The legislation will have a positive impact on health insurance coverage by making it accessible to more people. Accessibility will be guaranteed since the cost of insurance will be greatly decreased. Traditionally, the health insurance system is characterized by lengthy processes with numerous overheads which increase the cost of premiums paid by the consumers. Fenn, Gray, and Rickman (2007) report that administrative overheads incurred by insurance companies make up over 30% of the overall healthcare cost. The health care legislation HR 3962 attempts to deal with this by providing a public option that introduces a single-payer system. This system gets rid of the wasteful overheads that have raised the cost of insurance to a level that is beyond the reach of many people. By making insurance coverage affordable, millions of Americans who were previously unable to pay for the services will benefit and hence have access to health care. The low-income population will be the greatest beneficiaries of this legislation since it will be able to afford quality care that has in the past been enjoyed b those who could afford to pay for the costly insurance coverage.

A major demerit of the legislation is that it will impede on the free market as the government seeks to regulate the health care industry. Increasing government intervention in health care has led to a rise in overall health care spending by 25% over the last 40 years. Schansberg (2011) notes that increased intervention by the government in regulating and financing health care leads to higher and not lower health care costs which are detrimental to everybody. Government regulation also means that insurers are not free to set rates for premiums based on risk which exposes them to high risks. This condition is responsible for the high premiums which characterize the US health insurance market. Schansberg (2011) argues that less government involvement in health care would be beneficial for all since it would result in “freer markets which would mean far less subsidization and regulation of the transactions between insurers, providers, and consumers (p.30). A free market would also enhance competition which would not only lead to more choices being available to the consumer but also lower the cost of health care as various players seek to attract consumers.

The new legislation promises substantial and unpredictable medical cover for all citizens; an action that might be unsustainable in the long run. The quality of health care provided by our health care industry will therefore be negatively impacted by the legislation. As it currently stands, the system is already overloaded with practitioners having to serve more patients than they can effectively cope with. The legislation will lead to an influx of patients to the medical system. Schansberg (2011) notes that the health care reforms will result in people who do not need medical care visiting the doctor since they are eligible to fore services. The quality of care provided under the legislation will also be lower since the providers will not be concerned about competition. Low-quality services will therefore be more prevalent in our health care system.

The Main Types of Insurance in the US

The three main types of health insurance in the US are; indemnity insurance, health maintenance organizations, and preferred provider organizations. Indemnity insurance is structured after the traditional insurance where the insured party pays regular premiums and in exchange, the insurance company will compensate the insured the amount of a loss. According to the agreement made, the indemnity plans may pay a fraction of the patients’ medical costs which is usually 80%. Indemnity insurance gives the client complete liberty to choose a hospital or physician of their choice. However, most plans restrict the kinds of services that they will pay for. The growth of indemnity insurance is in question. Insurance companies cannot contain their risks since they are not allowed to specialize in insurance for specific sicknesses but instead, they have to cover a broad range of illnesses (Schansberg, 2011). The huge overhead costs incurred by private health insurance have led to great criticism of the scheme. In addition to this, health insurance by itself is not a very profitable business for insurers. As better insurance plans are developed, it can be projected that indemnity insurance will come to an end.

The second type of health insurance is the Health Maintenance Organizations (HMOs) which are organizations that receive premiums from subscribers and in exchange, they promise to provide all healthcare required by the subscriber for a defined period. A key goal of HMOs is to reduce hospital utilization in order to reduce the cost incurred. HMOs there place a restriction on the hospitals that a person can go to. Contracts between physicians and HMOs may also result in physicians being restricted from recommending referrals of certain expensive procedures not covered by the HMO. The future of HMOs is in question due to the dissatisfaction expressed by many users of HMO products. The imposition on caregivers as well as the restrictive nature of HMOs has led many people to opt for other insurance services. Schansberg (2011) suggests that the very nature of HMOs puts them in an antagonistic relationship with health care providers and all this has a negative impact on the patient. The administrative cost of HMOs makes them more expensive and as the prices of HMO premiums rise, people can be expected to look for cheaper options. HMOs will have to evolve into a form that is more equitable for all Americans if they are to survive the next 30 years.

The third main type of health insurance is the preferred provider organizations. This is a form of health plan in which the subscriber is provided with discounted health care through a network of providers. A PPO combines the fee-for-service type of insurance with the HMO since it allows a beneficiary to use a wide range of providers that have agreed to give the purchases a discount on regular fees (Hurley et al., 2004). The PPO enroller is free to obtain health care outside the network but this will require them to incur higher costs which they have to pay from their pockets. The PPO premium is relatively cheap which has made it attract many clients. While people understand that PPOs are limited compared to HMOs, the flexibility offered by the cost-sharing model is attractive to many (Hurley et al., 2004). As the cost of health insurance rises, more people are therefore likely to make use of PPOs. The solvency of PPOs is guaranteed since they are not required to cover the medical cost of the patient.

Does private health insurance violate the standard principles of insurance?

There are a number of ways in which private health insurance (PHI) violates the standard principles of insurance. Williams and Torrens (2007) note that the loss that insurance provides cover against is supposed to be something out of the ordinary. This is not the case with ill health which is an ordinary and highly occurring event for most people. A mechanism used by insurers to manage the financial risk is the transferring risk from an individual to a group. This is based on the assumption that losses are independent events and the likelihood of them occurring simultaneously is low. This is not the case with infections illnesses which imply a great degree of dependency among insured losses.

PHI also violates the standard principles of insurance since in many cases; the health care cost is not of a huge financial magnitude. The standard principles of insurance stipulate that a loss should be of such financial magnitude that it is unrealistic to budget for it (Williams & Torrens, 2007). PHIs offer indemnity for illnesses that may be of a very little financial magnitude to the insured. It is at times not possible to share losses on an equitable basis by all members of the insured group.

The Evolution of the promotion of health and disease prevention in the US

The American health care system has traditionally been disease-oriented with emphasize being placed on curative medicine. However, this trend has changed and increased emphasis is being placed on disease prevention and health promotion. The paradigm shift was catalyzed by health care professionals and researchers who sought to find ways to increase the effectiveness of health care provided (Aloysius, 2011). One of the earliest indications of the change in dominant culture occurred in 1973 when the President’s Committee on Health Education was created. This committee legitimized the emphasis on health education which was aimed at incorporating health promotion programs within educational institutes. Throughout this period, there was also an increased understanding that prevention activities and health promotion was applicable to all Americans; and not just those who suffered from some health issues.

The Surgeon General’s report on health promotion which was first published in 1979 was a major milestone in legitimizing a nationwide emphasize on health promotion. This report entitled “Healthy People” hoped to improve the health of the people through strengthening policy and practice (Aloysius, 2011). It hoped to increase public awareness on determinants of health and therefore promote health and the prevention of diseases. This culminated in the adoption of the Health People’s report as policy in the US. After this government recognition of health promotion and wellness programs, the profession gained a significant following (Williams & Torrens, 2007). Certification of health education and health promotion specialists began to occur throughout the 1980s. The emergence of a public health workforce was important in the advancement of preventive and healthy living efforts. Williams and Torrens (2007) that these professionals were able to deliver essential services to every community and disseminate much needed information both to and from the community. The data obtained from the community was used to inform policy making and therefore guide the establishment of policies and practices that maximized population and individual health.

The nation has continued on this trend and health improvement priorities are set for every decade. Measurable objectives and goals are then used to ensure that the right approaches are being used to improve health. Over the last decade, the US government has been placing more emphasis on health education and promotion (Williams & Torrens, 2007). Some early intervention actions have been mandated by the government with significant gains being made in improving the quality of life for people. The public and private sector are working together towards health promotion and prevention. Health care resources have been made available to low socio-economic status people who would have been more likely to seek curative health services instead of preventive services.


The US government has been a major stakeholder in the healthcare provision of its citizenry for many decades. While this government involvement has had some positive impacts, this paper has demonstrated that too much government involvement is not good for the health care system. It has shown how the Affordable Health Care for America Act legislation will decrease the quality of health care and damage the free market. The paper has also highlighted the issues that might lead to the failure of HMOs and indemnity insurance. Private health insurance by its very nature violates the major standard principles of insurance since illnesses are not something out of the ordinary. The paper has also reviewed the remarkable evolution of the promotion of health and disease prevention in the US. From the discussions provided, it is clear that the US health care system has not yet achieved health equity. However, further reforms may result in a good health care system that caters for the health needs of all Americans at a minimal cost.


Aloysius, J.C. (2011). The Affordable Care Act’s Preventive Services Mandate: Breaking Down the Barriers to Nationwide Access to Preventive Services. Journal of Law, Medicine & Ethics, 39 (3), 355-365.

Catlin, A., C. et al. (2007). National health spending in 2005: the slowdown continues. Health Affairs, 26(1), 45-62.

Fenn, P., Gray, A., & Rickman, N. (2007). Liability, Insurance and Medical Practice. Journal of Health Economics, 26 (5), 1057–70.

Hurley, R.E. Bradley, C.S. & White, J.S. (2004). The puzzling popularity of the PPO. Health Affairs, 23(1), 81-103.

Schansberg, E.D. (2011). Envisioning a Free Market in Health Care. Cato Journal, 31 (1), 27-58.

Williams, J.S. & Torrens, P.R. (2007). Introduction to Health Services. NY: Cengage Learning.

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