Incentivizing overspending or fueling innovation? – Healthcare Economist

Based mostly on a research by Frankovic and Kuhn (2022), the reply is each. Nonetheless, the worth of elevated innovation–as measured via longevity good points–greater than offset inefficiencies from overspending. Particularly, the authors use an overlapping generations mannequin the place people can buy medical health insurance and medical progress relies on well being care sector return on funding. The authors calibrate their mannequin utilizing longevity knowledge from the Human Mortality Database from 19650 via 2005, earnings knowledge from the Present Inhabitants Survey (CPS) and well being care spending knowledge from the Nationwide Heart for Well being Statistics (NCHS). This time-frame is related as 1965 was the 12 months Medicare was carried out within the US.

Utilizing this system, the authors discover that:

…extra in depth medical health insurance accounts for a big share of the rise in US well being spending but in addition boosts the speed of medical progress. A welfare evaluation exhibits that whereas the subsidization of well being care via medical health insurance creates extreme well being care spending, the good points in life expectancy led to by induced medical progress greater than compensate for this.

General, elevated ranges of medical health insurance lower consumption as extra money is spent on well being care. On the similar time, capital–notably capital invested in R&D–will increase as medical health insurance will increase returns on funding as extra sick sufferers are in a position to afford remedy. The authors observe that:

One rationalization for why the advantages from medical progress more and more outweigh the loss from ethical hazard lies with the continuing development of earnings: So long as per capita consumption is rising over time, people are inclined to assign an rising worth to life (Hall and Jones, 2007, Chen et al., 2021). This argument extends to the evaluation of ethical hazard, the place people are keen to tolerate an rising distortion from well being insurance coverage in trade for a rise in lifetime, so long as this solely slows down however doesn’t reverse consumption development.

The authors additionally observe that medical costs improve over time as a result of Baumol value illness; particularly the joint influence of productiveness development within the closing items sectors and medical progress itself result in larger costs.

Courtesy of the Journal of Health Economics.

You possibly can learn the complete paper here.