Applications of Demand and Supply

4.3 The Market for Health-Care Services


  1. Use the model of demand and supply to explain the effects of third-party payers on the health-care market and on health-care spending.

There has been much discussion over the past three decades about the health-care problem in the United States. Much of this discussion has focused on rising spending for health care. In this section, we will apply the model of demand and supply to health care to see what we can learn about some of the reasons behind rising spending in this important sector of the economy.

Figure 4.10 "Health-Care Spending as a Percentage of U.S. Output, 1960–2009" shows the share of U.S. output devoted to health care since 1960. In 1960, about 5% of total output was devoted to health care; by 2009 this share had risen to 17.6%. That means that we are devoting more of our spending to health care and less to other goods and services.

The Affordable Care Act of 2010 dramatically impacted health care services. Among its provisions is a requirement that individuals purchase health insurance (the so-called individual mandate). That provision may well result in the entire Act being ruled unconstitutional by the courts. As this book went to press, the Act was pending before the court system, and a ruling against it, or at least against parts of it, seemed possible.

The Act requires insurance companies to provide coverage for children on their parent's policies up to the age of 26. It also bars health insurance companies from denying coverage based on pre-existing conditions.

Provisions of the Act are extensive. It applies to virtually every aspect of health care services. It allows people to acquire health care insurance regardless of pre-existing conditions. It also allows employers to opt out of providing health insurance and to pay a fee instead.

Figure 4.10 Health-Care Spending as a Percentage of U.S. Output, 1960–2009

Health care's share of total U.S. output rose from about 5% in 1960 to 17.6% in 2009.

Why were Americans willing to increase their spending on health care so dramatically? The model of demand and supply gives us part of the answer. As we apply the model to this problem, we will also gain a better understanding of the role of prices in a market economy.