esposearch - ideal online careers

Economic Tools and Concepts: Health Care Industry

An economic tool refers to methods that are utilized by economists in the analysis of various issues. Such tools include the demand and supply curves which are used to illustrate various concepts such as elasticity and conduction of marginal analysis. In the health care industry, there is a wide range of issues that can be analyzed using these tools and concepts. The cost of health care has been on the increase in the 21st century. This paper seeks to illustrate the trend in the cost of health care as a current issue in the health industry.

In the recent past there has been an occurrence of health care inflation resulting in increased health care spending which has affected other sectors of the economy. A large percent of the population in U.S and other parts of the world lack medical insurance. This makes it difficult for them to meet the increasing cost of obtaining health care. The elasticity of health care cost to changes in the insurance premiums is high.

Cost Sharing

Within the health care industry there is the concept of cost-sharing which is a direct system of charging for health care services. This is a strategy of reducing the demand for health care, such as through payment of prescription fees for instance in the administration of osteopathy in U.S. This concept is also evident through incorporation of the insurance industry into the health industry through provision of medical cover. The health care costs have increased as a result of increased reliance on third parties in the payment of medical services. This results in increased use of medical resources since more people can be able to access the services without paying directly, (Stan, 1994)

Elasticity Of Health Care Products In U.S

There has been a dramatic increase in the cost of health care in US which has raised concern over its effect on the US economy. Rapid increase in health care spending has an effect of raising the rate of inflation. The effects are felt within all the sectors of the economy. This makes evident that the elasticity of the cost of health care is very high and its effects trickle to other sectors of the economy. Elasticity refers to the responsiveness of demand or supply to changes in price. Price elasticity of demand makes it possible to forecast expected changes in demand as a result of changes in price. Price in a perfectly competitive market reflects on decision regarding change of product quantity would result into a corresponding change in the demand. For instance the market for antibiotics reflects the preferences within the market. There is an inverse relationship between the cost of health care and the demand for instance in the cost of osteopathy,(Statewide Health Care Insurance Plan Task Force,2001)

Changes In The Demand And Supply

There has been an increase in the demand for the health care services in U.S over time. There has been an increase in the share of the U.S output that is allocated to the health care industry. The total amount allocated to health care has risen from 5% to 15% from the period of 1960-2004, depicting a rise in demand. Many of the Americans are spending are seeking the services of physicians whereas others have insurance covers from private firms,(Flat world,n.d).

This has resulted in an increase in demand for health care from 1 million to 1.5 million as illustrated by the graph. The patients are charged $10 while the insurance company pays $40.the supply curve depicts that it takes $50 for there to be an increase of the quantity supplied to 1,500,000.

Elasticity Of Demand

Demand is considered inelastic when a change in price leads to a small change in the demand with an elasticity of between 0 and -1. The elasticity of demand for health care products in U.S is high both in the private and the public sector.U.S has experienced a trend in the rise of health care costs over time resulting from the increased demand. For instance the period 1993-1999 witnessed a decline in the cost of health care with an elasticity of 1.9% but the trend has changed from 1999 onwards. This has had a significant effect on the uninsured who rely on public health care facilities. The demand for health care is inelastic to changes in prices. This means that a small percentage increase in health care does not result in a decrease in the quantity demanded. Despite this, the elasticity of demand for health care is becoming price elastic over time this is due to the fact that health care is not a homogenous product but is affected by other factors such as inpatient services and wellness care. The multiple effects of these services have resulted in a change in the elasticity of demand for health care,(Statewide Health Care Insurance Plan Task Force ,2001).

The elasticity of health care in US is also affected by the health insurance in that it covers individuals from the health care real cost. Increase in the cost of premiums results in a decrease in the demand for health care costs. According to a study by Arizona Health Care Cost, an increase of 1% in the cost of health care premiums, the number of Americans insured drops by 0.1% ,(2001).

Elasticity Of Supply

With regard to price elasticity of supply in the health care industry, the elasticity is inelastic in the short run but becomes elastic in the long run. In the case of rising in the price of health care products, firms that produce these products will not respond directly to changes in the price by increasing their production. This is due to the fact that there are other factors that need consideration such as building of more hospitals, more doctors and nurses to administer the health care services.

Marginal Analysis

Considering the increase in the cost of health care over time there is need for effective policy formulation within the entire medical system. This can be done through conduction of marginal analysis as illustrated in graph 1.Marginal analysis refers to the examination of the benefits and costs in terms of total revenue and total cost as a result of a unit change in the inputs. Marginal analysis helps in the correct diagnosis of the problem within the entire health industry. These include the physicians, medical specialists and health insurance companies. The increase in the over-use of medical care by ordinary Americans is one of the factors leading to increasing in the health care cost. The concept of marginal analysis is used to determine the ‘excessiveness’ of use in that the when the marginal value of resources used is higher than the marginal value obtained upon medical treatment. Economic concept of marginal analysis is concerned with value addition,(Stan,1994).

The marginal analysis of technology is also evident through the innovation of vaccines. The initial cost of a vaccine invention is high but the resultant benefits are cost saving in the future since few people will seek related treatment in the future.


Economic concepts and tools are of great importance in the determination of the issues related to health care with regard to the allocation of resources such as the cost. This is due to the fact that most of the decisions require an economic perspective before they are implemented. Marginal analysis helps in the conduction of cost-benefit analysis enabling the determination of economic efficiency of paramount issues.


Getzen, T. E. (2007), “Health economics and financing (3rd Ed.).”Hoboken NJ: John Wiley And Sons, Inc.

Kaiser Family Foundations (2007).”Health Care Costs Snapshots: How changes in Medical technology affects health care costs.” Web.

Mansfield, E. (1982) “Microeconomics: theory and applications.”New York: W. W. Norton.

Office of Health Care Economics, (2002). ‘Economics of health care: Elasticity.” Web.

Statewide Health Care Insurance Plan Task Force (2001): Elasticity of Demand For Health Care Services, Arizona Health Care Cost Maintenance System. Web.

Stan, L. (1994).Policy analysis: why health care costs too much. Web.

Flat world knowledge: the market for health care services. Web.


About the author

we will assist you 24/7

Quick Contact

Keep current with the ESPOSEARCH Blog. Let’s get it written!

EspoSearch Ⓒ 2022 - All Rights Are Reserved