Legal & Law

What Does Increase in Health Care Costs Do to the Economy?

As healthcare profit pools are threatened by COVID-19 pandemic, cost control should become a primary objective. Unfortunately, simply cutting healthcare spending won’t improve affordability or sustainability for the industry; rather, its root causes must also be tackled; prices and utilization have both seen increases over the years due to an aging population, rising healthcare prices, and use of higher-cost procedures that have all contributed to an uptick in spending.

Rising health care costs affect individuals’ incomes and wealth, leading to decreased spending power on other goods and services, contributing to slower economic growth. This reduction of household purchasing power has reverberations throughout the economy that could slow its pace of expansion.

Increased healthcare costs impede other forms of spending, including government borrowing. As a result, consumers and businesses pay higher interest rates, decreasing their ability to finance other activities that would boost economic growth – this phenomenon is known as “crowding out.”

Medical costs typically increase more quickly than consumer prices, contributing to its high share of national income expenditures. Slightly slowing the rate of healthcare cost growth could boost national savings and capital formation.

Physician and clinical services make up the greatest share of healthcare expenditures, but their growth has slowed since the COVID-19 pandemic began. Spending on physician and clinical services increased by 2.7% annually during 2022 – less than its rate in 2021 – due to lower demand due to pandemic conditions, slower medical innovation and inflation-based payment for services (Medicare, Medicaid, private health insurance and out-of-pocket).

Rising health care costs reduce employer-sponsored employment opportunities. Employers either must bear these additional expenses themselves (in commercial lines of business) or pass them along to employees as reduced wages and benefits.

Recent survey respondents indicated they were struggling to afford basic necessities due to health care costs, even those who were covered by employer, marketplace, or individual-market plans. Furthermore, increasing health spending has limited individuals’ savings for future needs.

Efficiency gains in health-care delivery can reduce both costs and their influence over other forms of spending. Efficiency can also help raise standards of living by freeing resources that could otherwise be put towards producing other desirable goods and services. Implement innovative payment models that align incentives with patient outcomes, develop drugs and devices to reduce medical error, and promote best practices in clinical settings. Furthermore, expanding access to health insurance by eliminating restrictions for preexisting conditions will allow individuals to both work and save for their futures.

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