Incentivizing overspending or fueling innovation? – Healthcare Economist

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

Utilizing this system, the authors discover that:

…extra in depth medical 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 by way of medical insurance creates extreme well being care spending, the positive factors in life expectancy caused by induced medical progress greater than compensate for this.

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

One rationalization for why the advantages from medical progress more and more outweigh the loss from ethical hazard lies with the continuing progress of earnings: So long as per capita consumption is growing over time, people are likely to assign an growing worth to life (Hall and Jones, 2007, Chen et al., 2021). This argument extends to the evaluation of ethical hazard, the place people are prepared to tolerate an growing 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 progress.

The authors additionally be aware that medical costs enhance over time because of the Baumol value illness; particularly the joint impression of productiveness progress within the ultimate 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.