Health Care in the United States: Why is Supply so Price Insensitive?

Abstract:     
Health spending as a percentage of gross domestic product in the U.S. economy is growing, from 5% in 1960 to about 16% in the current period, and it is predicted to grow to as much as 30% in 2050. Then why is the supply of health care in the United States so insensitive to steeply rising prices? This paper conducts an econometric study to show that high health-care costs have an adverse impact on labor productivity, causing a negative production externality in all industries. So, can the rising cost of health-care affect the U.S. comparative advantage? The paper seeks answers to these questions in a general equilibrium model and finds that the labor productivity shock is responsible for the sluggish or declining supply of health care. Consumers are able to afford less health care due to a possible decline in real wages. U.S. comparative advantage becomes a nonissue, provided that the equilibrium is stable in spite of a negatively sloped health-care supply curve. Negative externality, leading to market failure, may be addressed in two alternative ways.

Number of Pages in PDF File: 13

JEL Classification: F11, I11, I12, I18

Accepted Paper Series