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The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare

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  • Amy Finkelstein
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    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 substantially larger than what the existing evidence from individual-level changes in health insurance would have predicted. Consistent with a disproportionately larger impact of aggregate changes in health insurance, the evidence suggests that the introduction of Medicare altered the practice of medicine. For example, I find that the introduction of Medicare is associated with an increase in the rate of adoption of then-new medical technologies. 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 at least forty percent of the increase in real per capita health spending over this time period.

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    File URL: http://www.nber.org/papers/w11619.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11619.

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    Date of creation: Sep 2005
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    Publication status: published as Finkelstein, Amy. "The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare." Quarterly Journal of Economics 122, 3 (2007): 1-37.
    Handle: RePEc:nbr:nberwo:11619

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    1. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
    2. McGuire, Thomas G. & Pauly, Mark V., 1991. "Physician response to fee changes with multiple payers," Journal of Health Economics, Elsevier, vol. 10(4), pages 385-410.
    3. David M. Cutler & Richard J. Zeckhauser, 1999. "The Anatomy of Health Insurance," NBER Working Papers 7176, National Bureau of Economic Research, Inc.
    4. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1049-1090, August.
    5. Keeler, Emmett B. & Rolph, John E., 1988. "The demand for episodes of treatment in the health insurance experiment," Journal of Health Economics, Elsevier, vol. 7(4), pages 337-367, December.
    6. Cutler David M. & Sheiner Louise, 1998. "Managed Care and the Growth of Medical Expenditures," Forum for Health Economics & Policy, De Gruyter, vol. 1(1), pages 1-41, January.
    7. Feldstein, Martin S, 1977. "Quality Change and the Demand for Hospital Care," Econometrica, Econometric Society, vol. 45(7), pages 1681-1702, October.
    8. Glied, Sherry & Zivin, Joshua Graff, 2002. "How do doctors behave when some (but not all) of their patients are in managed care?," Journal of Health Economics, Elsevier, vol. 21(2), pages 337-353, March.
    9. David M. Cutler & Louise Sheiner, 1997. "Managed Care and the Growth of Medical Expenditures," NBER Working Papers 6140, National Bureau of Economic Research, Inc.
    10. Jonathan Skinner & Douglas Staiger, 2005. "Technology adoption from hybrid corn to beta blockers," Proceedings, Federal Reserve Bank of San Francisco.
    11. David M. Cutler, 2002. "Equality, Efficiency, and Market Fundamentals: The Dynamics of International Medical-Care Reform," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 881-906, September.
    12. Feldstein, Martin S, 1971. "Hospital Cost Inflation: A Study of Nonprofit Price Dynamics," American Economic Review, American Economic Association, vol. 61(5), pages 853-72, December.
    13. Glied, Sherry, 2000. "Managed care," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 13, pages 707-753 Elsevier.
    14. Amy Finkelstein, 2004. "Static and Dynamic Effects of Health Policy: Evidence From the Vaccine Industry," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 527-564, May.
    15. Manning, Willard G, et al, 1987. "Health Insurance and the Demand for Medical Care: Evidence from a Randomized Experiment," American Economic Review, American Economic Association, vol. 77(3), pages 251-77, June.
    16. Joseph P. Newhouse, 2004. "Pricing the Priceless: A Health Care Conundrum," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262640589, December.
    17. Thomas G. McGuire & Mark V. Pauly, 1991. "Physician Response to Fee Changes with Multiple Payers," Papers 0015, Boston University - Industry Studies Programme.
    18. Mark Duggan, 2000. "Hospital Ownership and Public Medical Spending," NBER Working Papers 7789, National Bureau of Economic Research, Inc.
    19. Amy Finkelstein & Robin McKnight, 2005. "What Did Medicare Do (And Was It Worth It)?," NBER Working Papers 11609, National Bureau of Economic Research, Inc.
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    Cited by:
    1. John F. Cogan & R. Glenn Hubbard & Daniel P. Kessler, 2006. "Evaluating Effects of Tax Preferences on Health Care Spending and Federal Revenues," NBER Working Papers 12733, National Bureau of Economic Research, Inc.
    2. Amy Finkelstein & Robin McKnight, 2005. "What Did Medicare Do (And Was It Worth It)?," NBER Working Papers 11609, National Bureau of Economic Research, Inc.
    3. Daron Acemoglu & David Cutler & Amy Finkelstein & Joshua Linn, 2006. "Did Medicare Induce Pharmaceutical Innovation?," American Economic Review, American Economic Association, vol. 96(2), pages 103-107, May.
    4. Daron Acemoglu & Amy Finkelstein, 2008. "Input and Technology Choices in Regulated Industries: Evidence from the Health Care Sector," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 837-880, October.
    5. John F. Cogan & R. Glenn Hubbard & Daniel P. Kessler, 2007. "Evaluating Effects of Tax Preferences on Health Care Spending and Federal Revenues," NBER Chapters, in: Tax Policy and the Economy, Volume 21, pages 65-82 National Bureau of Economic Research, Inc.

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