If we try to explain the high cost of medical expenses on the basis of forces of demand and supply only, there are two main factors contributing to it. First is the inelastic nature of demand for medical treatment and care. When a person is need of medical assistance, particularly in cases of serious or life threatening situations, the patients are are willing to pay any price within their means. If need arises a person will cut down many other expenses, take loans, and may be sell off some assets to pay for essential treatment. Because of this the providers of medical services are able to increase their charges without the fear of reducing their total demand for medical service.
Second reason for high cost of medical care is relatively inelastic supply. It takes a long time for people to complete the study of medicine and become qualified medical practitioners. In addition, the cost of education for becoming a medical practitioner is very high. Thus not many people are willing to spend that much time and money for becoming medical practitioners. In addition, there is a long lead time for making additional supply of medical practitioners after people realize the high earning potential for them.
The cost of medicines is also high because of monopolistic and market conditions existing in pharmaceutical business. Modern medical treatment depends heavily on new drugs discovered through very expensive research that takes a long time to develop and prove each new medicines. The companies that develop these medicines are then granted patent rights for extended periods. Because of this they have no competition for those specific drugs and they are able to charge very high prices, which the patients are forced to pay because of their inelastic demand.
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