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HomeHealthHealth careIncentivizing overspending or fueling innovation? – Healthcare Economist

Incentivizing overspending or fueling innovation? – Healthcare Economist





Based on a examine by Frankovic and Kuhn (2022), the reply is each. However, the worth of elevated innovation–as measured by longevity features–greater than offset inefficiencies from overspending. Specifically, the authors use an overlapping generations mannequin the place people should purchase medical insurance and medical progress is dependent upon 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 Current Population Survey (CPS) and well being care spending information from the National Center for Health Statistics (NCHS). This timeframe is related as 1965 was the 12 months Medicare was applied within the US.

Using this technique, the authors discover that:

…extra intensive 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 features in life expectancy caused by induced medical progress greater than compensate for this.

Overall, elevated ranges of medical insurance lower consumption as more cash is spent on well being care. At the identical 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 therapy. The authors word 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: As lengthy as per capita consumption is growing over time, people are inclined 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 keen to tolerate an growing 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 word that medical costs enhance over time because of the Baumol price illness; particularly the joint impression of productiveness progress within the remaining items sectors and medical progress itself result in increased costs.

Courtesy of the Journal of Health Economics.

You can learn the total paper here.



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