Health care is one of the most expensive goods and services in the economy. It is a complex, highly personalized service that has a significant influence on health and the quality of life. It has a unique symbolism and importance, reflecting the special value of caring and healing.
It is not easily compared to other commodities because it is a public good that affects society as a whole rather than individual consumers. It is also a rare commodity that is consumed without direct market exchange; a majority of health care spending is financed by government, employers, and private insurance. As a result, it is difficult to project future spending. Moreover, it is an incredibly dynamic sector, affected by many factors. Generally, the cost of health care rises with personal income growth and the age of the population. These trends, combined with rising health care costs, are driving increasing cost pressures in the United States.
The prevailing normative argument is that health care should be delivered in a market by profit-maximizing firms. Its price should reflect its long-run marginal cost, which is the opportunity cost of the resources used to produce it.
However, the reality is that health care production in the United States is regulated to a greater extent than other industrialized nations. It is a highly complex system of interrelated institutions, providers, and payers, each with its own goals, regulations, and incentives. Moreover, health care is a service that is provided by non-profit and not-for-profit organizations, which are generally subject to government regulation and restrictions on their ability to charge for services.
The result is that the cost of health care has a very different structure than that of other goods and services. For example, health care is more labor intensive than other industries and requires a specialized skill set. Consequently, the wages of health care professionals are considerably higher. This, combined with the fact that it is a public good, has led to efforts to control the market through a variety of methods.
These controls vary from instilling a culture of evidence-based practice, to regulatory initiatives associated with managed care (utilization review and pre-authorization programs) and designing funding models that attempt to align providers’ interests with issues of efficiency.
However, the fundamental problem lies in the information asymmetries between patients and their health care providers. Because patients are not fully informed about the nature of their illness and the effectiveness of alternative treatments, they may fail to purchase care that they would have purchased if they were well-informed. Additionally, this information asymmetry gives providers the power to manipulate one or more of quantity, quality and price in ways that are not obvious to patients. This is known as moral hazard. This has the effect of driving up expenditures, because it causes patients to buy more than they would if they had to bear the full cost of their care. It has also caused providers to increase the quantity of treatment that they recommend and to raise prices.