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An important paper on health care economics
Amy N. Finkelstein offers up a juicy abstract and paper:
Abstract: This paper investigates the effects of market-wide changes in health insurance by examining the single largest change in health insurance coverage in American history: the introduction of Medicare in 1965. I estimate that the impact of Medicare on hospital spending is over six times larger than what the evidence from individual-level changes in health insurance would have predicted. This disproportionately larger effect may arise if market-wide changes in demand alter the incentives of hospitals to incur the fixed costs of entering the market or of adopting new practice styles. I present some evidence of these types of effects. A back of the envelope calculation based on the estimated impact of Medicare suggests that the overall spread of health insurance between 1950 and 1990 may be able to explain about half of the increase in real per capita health spending over this time period.
Amy is an assistant professor at MIT; this week's Business Week has an article claiming she is revolutionizing health care economics. Perhaps that is an exaggeration, but her home page is worth a look.
Posted by Tyler Cowen on August 7, 2006 at 05:08 AM in Medicine | Permalink
Comments
If health insurance is to blame, why is health care spending in the US so much larger than in other developed nations where insurance is so much more prevalent?
Posted by: zaoem at Aug 7, 2006 9:50:25 AM
Amy Finkelstein does extremely good work, but to make the claim that she's revolutionizing health care economics requires that one ignores three decades of mainstream work in the field. Earlier work on the demand effects of insurance, unfortunately, got labelled with the moral hazard tag, which disguised the fact that it was simply dealing with downward sloping demand curves. Even the health technology arms race was in part driven by insurance. The odd incentives built into employer sponsored health insurance in its earlier days meant that there was no incentive for suppliers to compete through price; they did better by competing on the basis of the range of services that they could supply and the perceived quality of those services (usually judged by their capital intensity). And the idea that there was feedback between the spread of insurance coverage and rising health care prices has been in the health economics literature for a long time. Still, there's no doubt that Amy Finkelstein's work is very good stuff and well worth watching.
Posted by: Brian Ferguson at Aug 7, 2006 3:17:29 PM
The Business Week article holds her work out as a major empirical advance, which is clearly not so.
I haven't read her article, but apparently she either ignores or treads lightly on the fact that state regulation of the medical insurance industry has essentially destroyed
the market. This has been an ongoing process over several decades, and it
accelerated quite a bit in the 1990s.
This was well known to insurance agents and executives, and even to economists (although the latter didn't understand it as well as the former). Too bad her
reinventing the wheel is seen as
some sort of intellectual advance.
Posted by: Bill Stepp at Aug 7, 2006 6:38:03 PM
When my daughter and son were born 2two and a half months prematurely, they were both eligible for medicaid because of their extremely low birth weights (not us or parents, but the babies themselves) - that taxpayer funded program paid for all the expenses not covered by our insurance. No test or program was debated by the hospital staff since medicaid paid for what our insurance would not. Ultimately, we only paid about $2,000 out of pocket with insurance picking up almost $300,000! In fact, the very same hospital's major source of income was the medicaid program - over $70 million! Our combined income last year was $95,000 - we live in South Carolina. Go figure...
Over the years, we have been told, "You've got great insurance; you won't have to pay for that test or operation - let's do it!" If we pay "cash", the service is considerably lower - including auto repairs and other insurance protected industries. The incentive to "buy" the service despite the actual cost is enticing when out of pocket expenses are low.
When South Carolina offered to all state high school graduates $5000 yearly scholarships that could be used at state universities/colleges - guess what? - tuition increased every subsequent year and more high school graduates went to college; even with a state lottery that spends more than 90% of its proceeds on colleges and universities, tuition went up. I believe that colleges knew that parents had more disposable income because of the scholarship program. After about four years of raising tuition - at about 10 to 15 percent per year - the governor finally had to halt the tuition increases.
I'm no economist, but certainly these practices would affect the consumption of health care, even the cost of healthcare as providers spend more on new technologies knowing that the cost will be covered by private insurers or the fed./state government.
For one year, we had an HSA and saved a great deal on regular insurance premiums and managed to save a great deal in our HS account that would carry over to the next year if unused. Our deductible was reasonable - about $6000. One can imagine that a family with a large source of income (and our income would be considered to be in the top 15%) would ultimately choose this program as 100% of healthcare costs are covered after expending the $6000. The incentive to stay healthy and avoid frivolous doctor visits is greater with HSAs. If most Americans used this program, I am sure healthcare spending would decrease causing prices to decline as well.
Posted by: Mike at Aug 7, 2006 10:26:24 PM
Mike,
What is frivolous? Some people might only go to the doctor when something is wrong and by then, the costs will rise and probably be higher than if there were regular check-ups. People tend to have a short term horizon as far as health and other issues go. If they feel ok or that they can tough it out, people will avoid a doctor. However, for long term cost reduction, it's best if people see a doctor once or twice a year to make sure everythings running smoothly. Wouldn't it be preferable to cover a limited number of check-ups and have the rest be extra?
Posted by: Mo at Aug 8, 2006 4:50:44 AM
You know, the HSA model does have some very understandable theoretical advantages. Ever since I've started paying for stuff myself--I'm twenty-one right now--I've become a lot more aware of how I spend money, so it's not entirely unreasonable to believe the same could work for health care. I don't recall if this is part of the Bush administration's plan, but in at least some advocacies of HSA-style plans, I've seen suggestions that some people would need to be given subsidies to pay for health care. That makes sense to me, but I wonder, why don't conservatives acknowledge that this would require greater taxation?
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