Incentivizing overspending or fueling innovation? – Healthcare Economist

Primarily based on a research by Frankovic and Kuhn (2022), the reply is each. Nonetheless, the worth of elevated innovation–as measured by longevity positive factors–greater than offset inefficiencies from overspending. Particularly, the authors use an overlapping generations mannequin the place people should purchase medical insurance and medical progress relies on well being care sector return on funding. The authors calibrate their mannequin utilizing longevity information from the Human Mortality Database from 19650 by 2005, earnings information from the Present Inhabitants Survey (CPS) and well being care spending information 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 technique, 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 medical insurance creates extreme well being care spending, the positive factors in life expectancy led to by induced medical progress greater than compensate for this.

Total, elevated ranges of medical insurance lower consumption as more cash 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 capable of afford remedy. The authors notice that:

One rationalization for why the advantages from medical progress more and more outweigh the loss from ethical hazard lies with the continued progress 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 prepared to tolerate an rising distortion from well being insurance coverage in change for a rise in lifetime, so long as this solely slows down however doesn’t reverse consumption progress.

The authors additionally notice that medical costs improve over time because of the Baumol price illness; particularly the joint influence of productiveness progress within the remaining items sectors and medical progress itself result in greater costs.