Rising Medical Cost

Topic Paper – Week 2

The Cost of Rising Medical Expenses

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Abstract

Medical costs have been rising consistently over the last two decades. Data available from BLS shows that not only was the gap between the price of all goods (that includes medical expenses) and medical expenses high in the 1980s but that the gap has been growing. The attached file shows the trend of price index of all goods, and that of medical expenses. As we can see the gap has increased over the last two decades. Not only have medical expenses been rising, but they have been rising at a faster clip as can be seen from the inflation graph: medical inflation has consistently been higher than that of other goods. This poses serious problems for the common people. The problem stems from one simple fact: medical services are a necessity people will get them even if the prices shoot through the roof. This has major consequences for our overall economic health. To see how let us take the standard economic analysis that the economists undertake: one using indifference curves and budget lines. Everyone tries to maximize his or her benefit given the constraints they face. People want to consume everything, but they cannot, given their incomes, and hence they have to make choices. This gives rise to what are called convex indifference curves: people are assumed to be indifferent between consuming any two bundles on the line. The want to consume more of every good, hence the further the curve moves out the better it is for consumers. But, they can only go as far as their budget allows, and hence economists assume that people will go to the farthest curve reachable using their income. This is shown using the following graph:

[pic]What the graph shows is this: there is some consumer who is on the curve that is on the outside. He consumes at a certain point shown as A on the curve. There he consumes an amount M of medical...