Economic Tools and Concepts in the U.S. Health Care Industry

The Health Care Industry: Public, Private, and Market Forces

There are two sets of health issues and many players in the health industry. One set of paradigms deals with public and private health care issues, and the other concerns the emerging trend of market-oriented changes in the health care industry. Health care was historically a public service but has since transformed into a competitive industry. In other words, it has become a part of the national economy, and economic analysis is important not only to caregivers and institutions but also to doctors and medical workers, because the health industry is highly competitive. The debate on public health issues changed over time with more scientific developments and new insights into community care and medicine (Fox & Ludden, 1998).

Some of the major developments at the end of the 20th century caused significant public sector reforms, leading to changed views on community health questions, public health services, hospitals, and other providers. Consequently, the private sector was encouraged to step into the field. During the 1980s, budget deficits were a powerful motive for public sector reforms in many parts of the world, with emphasis placed on privatization that could improve services rather than simply analyzing existing conditions. From that point on, health care markets, like all others, have been influenced by supply and demand. The more competitive environment created purchasers such as insurers and investors in the industry, who have now become beneficiaries of market forces. As a result, the cost of health care has grown to represent a significant percentage of the gross national product (GNP) due to the interplay of demand and supply changes (Fox & Ludden, 1998).

Supply and demand in the health industry is driven by both the public and private sectors, and this dynamic has paved the way for the growth of medical science. The health care sector has had to adapt to commercialization and apply management techniques and analyses drawn from the corporate world. This requirement applied equally to caregivers, hospitals, insurance companies, and other service providers.

Economic Tools Adapted for the U.S. Health Care Industry

The analytical concepts now used in health care have been borrowed from highly competitive markets that are significant factors in the national economy. The same tools that are useful for business analysis have been found applicable to the health care industry. Doctors and medical workers were not traditionally "commercial" in their orientation. However, economic changes in the U.S. economy from the period 1960–1980 shaped and affected the current trends and the present landscape of health care. This era began with extreme instability in political, economic, and broader social relations in the United States, eventually leading to a major transformation at the beginning of the new millennium (Heirich, 1998).

The face of the industry has changed, and so have its requirements. Value creation today is largely carried out by pharmacy benefit managers (PBMs) and health maintenance organizations (HMOs). The new health care players therefore need these tools to improve medical cost management skills and to build a competitive organizational culture (Goh & Pritula, 1996). As a result, economic tools have gained considerable importance in the health care field.

Cost-Benefit Analysis in Health Care

There are many tools that economists use for various purposes. One of the most effective is cost-benefit analysis (CBA). This tool has been used by many economists for both macroeconomic and microeconomic analysis, particularly where variables and factors of production are concerned. Cost-benefit analysis is essentially an inventory of all costs, evaluated against a particular effect or outcome. The requirement is that both costs and benefits must be measured in the same unit. Being a measure of value, input-output analysis is typically conducted in monetary terms: monetary costs are compared not against ideological or ideal outputs such as "better health," but against quantifiable monetary value. While this is feasible in some contexts — insurance, for example — the question of whether medical services and their benefits are fully quantifiable in monetary terms remains open. In practice, there is recognition that health services may not be strictly measurable in money, so satisfaction and other qualitative and subjective data must be measured and compared as percentages. In the medical industry, some situations are not even amenable to this kind of analysis (Morris, Devlin, & Parkin, 2007).

For example, the noted economist Milton Friedman, writing about the economics of the medical care industry, observed that costs in medical spending had risen in inflation-adjusted dollars per person and as a fraction of national income (Friedman, 2001). What benefits — outputs — have resulted from the spending on medical care — inputs? Or, to frame it differently, what is the most optimum output? The answer is straightforward: "good health" (Friedman, 2001). This example illustrates both the value of the CBA tool and its limitations with regard to non-quantifiable variables.