Rising Healthcare Costs

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RISING HEALTHCARE COSTS AND MEDICARE

James Richardson
Professor Lewis
Health Policy

Over the past 30 years, the American healthcare system has been plagued by the continuous rise of healthcare costs. These costs include but are not limited to insurance premiums, co-payments as well as prescription drugs. One of the significant reasons for the increase in healthcare costs is that nowadays people are living longer lives than they did in the past and the prevalence rates of contracting chronic diseases and developing life threatening injuries are causing the United States healthcare system to suffer a financial crisis. There are three major industries in the healthcare sector: •(1) The healthcare service industry consisting of providers such as medical practices, hospitals, clinics, nursing homes and home health care agencies; •(2) The healthcare insurance industry consisting of both government programs such as Medicare and commercial insurers; and •(3) The managed healthcare industry consisting of organizations such as health maintenance organizations (HMOs) that incorporate both insurance and provider functions. (Gapenski, 1999). Currently, citizens of the United States spend 15 percent of income expenditures on healthcare. It is estimated that these expenditures are likely to rise to about 29 percent of Gross Domestic Product (GDP) by the year 2040. (Fogel, 2009). On the other hand, the major funder of healthcare costs in the U.S. is the Medicare program. Medicare is an insurance program created in the mid-1960s to cover medical services (such as hospital, institutional, and other home care) for the elderly that is funded by a payroll system. (Butler, Lave & Reischauer, 1998). The Medicare program of healthcare for the elderly currently costs more than $5,000 per enrollee, a national cost of more than $200 billion annually. It is projected that the costs for Medicare will rise rapidly from 2.5 percent of GDP to 5.5 GDP in 2030 and 7 percent of GDP in 2070. (Feldstein, 1999). The rapid increase of healthcare costs and Medicare has attributed to the current economic crisis and is weighing heavily upon United States’ families, businesses, and government budgets. HOW IS HEALTHCARE AND MEDICARE FINANCED?

The cost of healthcare and Medicare is an enormous part of the U.S. economy. It has various components, with various types of organizations all playing an important part in the overall delivery of healthcare. “Healthcare finance” is the terms used to describe how society chooses to finance the health services of its members. It involves the collection of premiums from payers and the payment of funds to healthcare providers for services rendered. (Gapenski, 1999). Typically, health care is provided by for-profit and non-profit organizations as well as governmental organizations. In addition, there are service providers, suppliers, and insurers. Health care financing is a form of a reimbursement system that is often paid by third parties. The third party is often someone other than the individual receiving the medical care and includes insurance companies, government programs and other payers. (Finkler & Ward, 2006). The majority of health care providers have established rates for their services known as charges. On the other hand, providers also have rates that they have negotiated and agreed to with insurance companies and governmental agencies, such as Medicare. Depending on the type of insurance (whether it is personal or governmental) the patient pays some portion of the bill at the time of service known as co-pay. (2006). The insurance premium coupled with the co-pay is calculated to find the income expenditures of health care. The portion of the health care bill paid by the governmental agency is calculated as the costs of Medicare. There are four basic modes of paying for healthcare: (1) out of pocket payment, (2) individual private insurance, (3) employment-based group private...
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