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4.3: The Market for Health-Care Services

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  • Learning Objective

    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 4.14 “Health-Care Spending as a Percentage of U.S. Output, 1960–2003” 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 2004 this share had risen to 15.4%. That has meant that we are devoting more of our spending to health care, and less to other goods and services, than we would be had health-care spending not risen so much.

    Figure 4.14 Health-Care Spending as a Percentage of U.S. Output, 1960–2003


    Health care’s share of total U.S. output rose from about 5% in 1960 to 15.3% in 2003.

    Data for period 1960–1992 from Health Care Finance Association (which was the predecessor to the Centers for Medicare and Medicaid Services); Data for period 1993–2003 from Centers for Medicare and Medicaid Services, Office of the Actuary: National Health Statistics Group