Cost vs. quality in healthcare in the US economic theory

Executive Summary

The healthcare community in the United States is very vibrant. It is characterized by research and development that have resulted in innovation of new drugs and treatment methods that have offered hope to many people in the US and other parts of the world. However, the US leads other industrialized nations in healthcare spending but still performs poorly in health outcomes like equity, health access and efficiency among others. From this it can be seen that Americans receive low quality healthcare from the money they spend. This raises questions about where the money spent on healthcare goes to. This paper discusses the cost vs. quality in healthcare in the US economic theory.

Problem statement

The lack of US government management of healthcare prices in setting healthcare costs and negotiating the costs down if need be has allowed for profit insurance companies to set their own prices thereby increasing the healthcare costs without necessarily increasing the quality of healthcare provided.

Literature review

It can be argued that economic competition among the different healthcare providers is the bedrock of US healthcare market. The system has been set up in a manner that encourages competition with a bid to reduce costs. Healthcare consumers are therefore expected to use their economic power to reward firms that develop products and services that reduce healthcare costs (Porter & Teisberg, 2004). Healthcare firms are therefore expected to innovate new products and services in order to reduce costs while improve the quality of healthcare delivered to patients. Healthcare firms that do not innovate and are not cost effective cannot thrive in such a system. These are some of the characteristics of the American healthcare system.

According to Sirgy, Lee & Yu (2011 p. 459), the US has the highest healthcare expenditure per capita when compared to other industrialized nations. There are different factors that have contributed to this: the government has invested in research and development of new technology that can heal the sick; this has created a situation where individuals with chronic illnesses can live longer (Kumar, Ghildayal & Shah, 2009 p. 376).  Furthermore, federal and state legislations have expanded the entitlements to healthcare. Government assisted public healthcare systems like Medicare and Medicaid have also increased over the years. Medicare and Medicaid and tax incentives offered for individuals to purchase medical cover through their employers increases demand. This results in marginal increase in the costs (Testa & Block, 2013 p. 106). The high healthcare expenditure per capita has created a healthcare crisis in the United States. This crisis demonstrates the problematic nature of the libertarian model used in the US healthcare system. This model has increased the disparity of healthcare outcomes between the rich and the poor. This is because the rich are able to receive better health outcomes than the poor. The lack of government regulation in setting healthcare costs and negotiating the costs down if need be has allowed for profit insurance companies to set their own prices thereby increasing the healthcare costs without necessarily increasing the quality of healthcare provided.

This is supported by McClellan who takes the point further and argues that cost control can be achieved if the government adopts a system in which the decision of the provider and the patient and determined by the value that they derive from the system. In this, there should be a link to healthcare payments to the measures of efficiency and quality in the healthcare system (McClellan, 2011 p. 70).

Price regulation is a system where a government agency sets insurance premiums or reviews prices and requests for increase of the premiums. Price regulation comes in different forms including setting hospital rates, reviewing requests for premium increase and in some cases even setting levels that can be charged by providers.

However, Pope (2013) argues that cost control should be handled strategically to avoid the failures that have always been associated with the controls. Some of the failures include inefficient allocation of resources resulting in shortages thereby reducing the overall quality of the healthcare system. Controlling costs also limits innovation and allows for the development of black markets in healthcare delivery. These limitations may result in higher costs for the patients (Pope, 2013).

The current payment systems do not look sustainable from both the fiscal and the political sides. There should therefore be reforms in the payment systems to ensure that quality is improved while costs are reduced. However, it is not very easy to change healthcare payment systems. This is due to the fact that it is difficult to change explicit standards once they have been put in place; this is due to the nature of people to always want to stick to the status quo (Patel & Rushefsky, 2014). The section below will analyze the different problems that exist in the US healthcare deliver systems and propose some solutions to the problems.

Problem analysis

  1. Healthcare rationing

Healthcare rationing refers to the manner in which healthcare resources are allocated. In the United States, healthcare rationing is achieved through different market forces and the government programs like Medicaid, Medicare and Veteran Affairs. The main reasoning behind rationing is that there is a limit to what healthcare consumers can expect and afford. Healthcare rationing therefore eliminates the faulty assumption that medical care produces health and more care produces more health (Patel & Rushefsky, 2014).

To reduce healthcare costs and maintain quality, the American society must expect to forego some medical benefits; patients should therefore be ready not to receive all the medical care irrespective of the costs of the care. In simple terms, rationing will ensure that Americans utilize only the services they need. It is important to understand that healthcare rationing already exists in the United States albeit silently. This is based on actions of hospitals, physicians, insurance companies and individual premium payers. However, there is need for healthcare rationing to be done more ethically in the United States (Patel & Rushefsky, 2014).

Rationing can either be implicit or explicit. Implicit rationing refers to decisions made by managers and other healthcare professionals in the healthcare system. On the other hand, explicit rationing refers to administrative decisions regarding resource allocation and populations eligible to use the resources. Explicit rationing is affected by the amount of resources available, expenditure levels and location of programs and facilities (Patel & Rushefsky, 2014).

Rationing can help in reducing wastages in the healthcare delivery system. This will help in better utilization of the limited resources like providers thereby improving the quality of healthcare delivered. However, the anticipated difficulty in rationing is that different consumers have different healthcare needs. It will therefore be very difficult to design a rationing mechanism for the different consumers (Patel & Rushefsky, 2014). The other challenge is on government decision regarding healthcare allocation. The government must always find a balance between optimum utilization of resources and claims of bias or unfairness in allocation of resources.

  1. Engaging consumers using technology tools

The quality of healthcare can be improved if more technology tools are used to engage consumers on their health. Patients who are more engaged always have better health outcomes in terms of reduced costs and improved quality (Kennedy, 2011 p. 386). Information and communication technology tools can play a key role in consumers’ lives like influencing positive purchasing decisions and improve their knowledge on healthcare information. For example, the tools can be used to educate the population more on the dangers of fatty foods. This is based on the increased concern of obesity on the American population. Other lifestyle choices that can be taught using the tools include exercising and working out. This can lead to a very healthy population thereby reducing the healthcare costs.

When patients are more engaged using the tools, they are likely to adhere to the treatment plan. They are also likely to focus more on behavioral change in order to improve their wellness. Engagement empowers patients through information thereby enabling them to make better decisions regarding their lives. The treatment plan will make them to use the treatment options well; this will not result in overuse of drugs or other technologies a fact which has always been associated with increased investment by the government in healthcare.

In summary, greater engagement of patients therefore support all the attributes that are related to improving the quality of care including access to information, strong clinical and organizational leadership, timely access to care and focus on prevention, wellness and healthy lifestyles (McClellan & Rivlin, 2014). Electronic tools give patients access to many enlisted providers thereby providing patients with options.

The negative outcomes of this option are that it may be limited to specific people. This is due to lack of access to the technology tools especially for the poor populations. Furthermore, the populations may not have access to internet and may have health information illiteracy thereby limiting application of the tools. There is also concern on security and privacy of information that is shared across the networks. It is also very difficult to convince providers about the business case of this option due to the current reimbursement model that rewards volumes without necessarily considering the outcome of the healthcare delivered (Kennedy, 2011).

  1. Stronger competition in health plan marketplaces

Stronger competition should be encouraged in the healthcare marketplace. Transparent competition on price and quality would encourage innovation among insurance companies. The innovation will allow customers to get high quality care at a relatively low cost. The competition should be supported by insurance companies providing consumers with accurate information on premiums, out of pocket costs and the quality of service that each plan has (McClellan & Rivlin, 2014).

To the consumers, competition will make insurance companies offer many subsidies to the plans they currently have. The insurance companies will also insist on operating with competent providers in order to create a difference in the marketplace. This will help in lowering the healthcare costs while improving on quality of the services delivered.

If the structure of the provider and insurance market is well analyzed, then competition can be used as a way of reducing prices and increasing quality. The challenge with this is the concentration of economic power that may exist in some healthcare marketplaces; the hospital market is dominated by very few players in many parts of the United States. This is due to the huge amounts of capital required to invest in these markets thereby limiting the number of players. The market concentration of some providers may make it difficult for consumers to force a reduction in the prices. This is due to lack of options that may exist in these regions. Competition alone can therefore not be reliable in reducing healthcare costs and improving quality. Even though there are some remedies in the antitrust laws, they do not provide enough cover due to the length and cumbersome nature of the litigation processes that may occur (McClellan & Rivlin, 2014).

  1. Opening America to inbound medical tourism

Due to the advanced nature of America’s healthcare system, many patients travel to receive specialized treatment in the United States. This is inbound medical tourism. However, there are also Americans who travel to other countries like India to receive cheaper medical care due to the high costs of specialized treatment in America. This is outbound medical tourism (Hunt, 2013).

Inbound medical tourism is an opportunity for American providers to diversify their revenue sources. This will reduce overreliance on Americans who are already overburdened with high costs. The additional revenue received from foreigners can help in cushioning the providers especially during recession. This can help in reducing costs since providers will still have the volumes and will therefore not need to increase costs in order to meet their targets (Hunt, 2013).

Inbound medical tourism potential in the United States has not been fully exploited because of the stringent visa application regulations and the wait times for the applicants. However, a change in this policy may have a negative effect on America’s security. Inbound medical tourism provides additional revenue for US hospitals (Hunt, 2013).

In addition to opening up the country to inbound medial tourism, the United States should also open up for foreign medications. This will help the country attract top talents from other regions like Europe. The talent can then work on developing new treatment technologies.

Solution and its implementation

Rationing healthcare services is a payment reform that will help in reducing healthcare costs while improving quality. Rationing will encourage consumers to pay only for the services that they need and eliminate the current practice where providers have focused more on the volume and intensity without considering the quality of the services they deliver. This will help in reducing healthcare costs. Eliminating wasteful spending will have a benefit of improving productivity of the healthcare system while also contribute to slowdown in overall healthcare spending growth.

However, the cost of such a system will be innovation in the system delivery process. Providers are always motivated when there are huge profits to be made. In such a case, providers will not be motivated because profits will be reduced. To encourage innovation, the government should provide incentives to providers who reduce costs while improve quality and innovate new products and services in care delivery. This will have a long term effect of lowering costs further (Kumar, Ghildayal & Shah, 2009 p. 382).

The effectiveness of this solution can be evaluated by analyzing the proportion of GDP that the government spends on healthcare currently and the proportion the government will spend after the solution is implemented in full. Evaluation can also be done by obtaining data from consumers of the healthcare system now and after the solution is fully implemented.

The problem with rationing is that it may not be sensitize to patients’ demands. This problem can be eliminated by educating patients to always prioritize and pay only for what they need. The other problem is that full implementation of rationalization can result in providers specializing in specific types of patient problems. This problem can be eliminated by encouraging coordination and cooperation among physicians, surgeons and other professionals involved in healthcare delivery. Through this, they can be able to gain from the strengths of one another while eliminating their weaknesses.

The inherent risk as has been mentioned above is that it may stifle innovation due to the limited financial benefits. To encourage innovation, the government should provide incentives to providers who reduce costs while improve quality and innovate new products and services in care delivery.

The United States has adequate time and money to implement this solution. However, the solution depends on other people being rational. Much it is in the public domain that healthcare costs have been rising over the years, not every American has the understanding that there are limits to expectations and what individuals can afford in the way of healthcare. The misunderstanding comes from income disparities that exist between members of the American society. Americans must therefore establish priorities in health and become rational in their healthcare spending.

It should be noted that consumer rationality exists when consumer options are related to the monetary resources that are available at their disposal. This results in a market mechanism that determines what is produced and the production and distribution mechanisms. This therefore leads to maximum consumer utility of the product. Consumer rationality is also related to access to information about different products and services (Rahtz & Szykman, 2008).


Healthcare rationing will help in reducing costs while improving quality of the American healthcare system. This is because rationing will help in reducing wastages in healthcare delivery system. The reduction in wastes will help in better utilization of resources allocated. The allocation of resources is a challenge to healthcare rationing. This is because some people may feel that they are discriminated against. The government must always allocate resources optimally to ensure that they are available whenever they are needed (Patel & Rushefsky, 2014).


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