IDEAS home Printed from https://ideas.repec.org/a/eee/jhecon/v87y2023ics016762962200131x.html
   My bibliography  Save this article

Health insurance, endogenous medical progress, health expenditure growth, and welfare

Author

Listed:
  • Frankovic, Ivan
  • Kuhn, Michael

Abstract

We study the impact of health insurance expansion on medical spending, longevity and welfare in an OLG economy in which individuals purchase health care to lower mortality and medical progress is profit-driven. Three sectors are considered: final goods production; a health care sector, selling medical services to individuals; and an R&D sector, selling increasingly effective medical technology to the health care sector. We calibrate the model to the development of the US economy/health care system from 1965 to 2005 and study numerically the impact of the insurance expansion. We find that more extensive health insurance accounts for a large share of the rise in US health spending but also boosts the rate of medical progress. A welfare analysis shows that while the subsidization of health care through health insurance creates excessive health care spending, the gains in life expectancy brought about by induced medical progress more than compensate for this.

Suggested Citation

  • Frankovic, Ivan & Kuhn, Michael, 2023. "Health insurance, endogenous medical progress, health expenditure growth, and welfare," Journal of Health Economics, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:jhecon:v:87:y:2023:i:c:s016762962200131x
    DOI: 10.1016/j.jhealeco.2022.102717
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S016762962200131X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jhealeco.2022.102717?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Dora L. Costa & Matthew E. Kahn, 2004. "Changes in the Value of Life, 1940--1980," Journal of Risk and Uncertainty, Springer, vol. 29(2), pages 159-180, September.
    2. Raquel Fonseca & Pierre-Carl Michaud & Titus Galama & Arie Kapteyn, 2021. "Accounting for the Rise of Health Spending and Longevity," Journal of the European Economic Association, European Economic Association, vol. 19(1), pages 536-579.
    3. Jung, Juergen & Tran, Chung, 2022. "Social health insurance: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    4. Laurence C. Baker & Ciaran S. Phibbs, 2002. "Managed Care, Technology Adoption, and Health Care: The Adoption of Neonatal Intensive Care," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 524-548, Autumn.
    5. Daron Acemoglu & Amy Finkelstein & Matthew J. Notowidigdo, 2013. "Income and Health Spending: Evidence from Oil Price Shocks," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1079-1095, October.
    6. Kuhn, Michael & Wrzaczek, Stefan & Prskawetz, Alexia & Feichtinger, Gustav, 2015. "Optimal choice of health and retirement in a life-cycle model," Journal of Economic Theory, Elsevier, vol. 158(PA), pages 186-212.
    7. David M. Cutler, 2008. "Are We Finally Winning the War on Cancer?," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 3-26, Fall.
    8. Weil, David N., 2014. "Health and Economic Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 3, pages 623-682, Elsevier.
    9. Jeffrey P. Clemens & Morten Olsen, 2021. "Medicare and the Rise of American Medical Patenting: The Economics of User-Driven Innovation," CESifo Working Paper Series 9008, CESifo.
    10. Raj Chetty, 2006. "A New Method of Estimating Risk Aversion," American Economic Review, American Economic Association, vol. 96(5), pages 1821-1834, December.
    11. Torben M. Andersen & Joydeep Bhattacharya, 2017. "The Intergenerational Welfare State and the Rise and Fall of Pay‐as‐you‐go Pensions," Economic Journal, Royal Economic Society, vol. 127(602), pages 896-923, June.
    12. Ivan Frankovic & Michael Kuhn & Stefan Wrzaczek, 2020. "On the Anatomy of Medical Progress Within an Overlapping Generations Economy," De Economist, Springer, vol. 168(2), pages 215-257, June.
    13. Carl-Johan Dalgaard & Holger Strulik, 2014. "Optimal Aging And Death: Understanding The Preston Curve," Journal of the European Economic Association, European Economic Association, vol. 12(3), pages 672-701, June.
    14. Abe Dunn, 2012. "Drug Innovations and Welfare Measures Computed from Market Demand: The Case of Anti-cholesterol Drugs," American Economic Journal: Applied Economics, American Economic Association, vol. 4(3), pages 167-189, July.
    15. Kuhn, Michael & Prettner, Klaus, 2016. "Growth and welfare effects of health care in knowledge-based economies," Journal of Health Economics, Elsevier, vol. 46(C), pages 100-119.
    16. Mariacristina De Nardi & Eric French & John B. Jones, 2010. "Why Do the Elderly Save? The Role of Medical Expenses," Journal of Political Economy, University of Chicago Press, vol. 118(1), pages 39-75, February.
    17. Mehrdad Roham & Anait R. Gabrielyan & Norman P. Archer & Michel L. Grignon & Byron G. Spencer, 2014. "The Impact Of Technological Intensity Of Service Provision On Physician Expenditures: An Exploratory Investigation," Health Economics, John Wiley & Sons, Ltd., vol. 23(10), pages 1224-1241, October.
    18. Kotschy, Rainer, 2021. "Health dynamics shape life-cycle incomes," Journal of Health Economics, Elsevier, vol. 75(C).
    19. Chernew, Michael E. & Newhouse, Joseph P., 2011. "Health Care Spending Growth," Handbook of Health Economics, in: Mark V. Pauly & Thomas G. Mcguire & Pedro P. Barros (ed.), Handbook of Health Economics, volume 2, chapter 0, pages 1-43, Elsevier.
    20. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(3), pages 1049-1090.
    21. Ana Lucia Abeliansky & Holger Strulik, 2018. "How We Fall Apart: Similarities of Human Aging in 10 European Countries," Demography, Springer;Population Association of America (PAA), vol. 55(1), pages 341-359, February.
    22. Baker, Laurence C., 2001. "Managed care and technology adoption in health care: evidence from magnetic resonance imaging," Journal of Health Economics, Elsevier, vol. 20(3), pages 395-421, May.
    23. Finkelstein, Amy & McKnight, Robin, 2008. "What did Medicare do? The initial impact of Medicare on mortality and out of pocket medical spending," Journal of Public Economics, Elsevier, vol. 92(7), pages 1644-1668, July.
    24. Ralph S. J. Koijen & Tomas J. Philipson & Harald Uhlig, 2016. "Financial Health Economics," Econometrica, Econometric Society, vol. 84, pages 195-242, January.
    25. Maik T. Schneider & Ralph Winkler, 2021. "Growth and Welfare under Endogenous Lifetimes," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(4), pages 1339-1384, October.
    26. Pierre Dubois & Olivier de Mouzon & Fiona Scott-Morton & Paul Seabright, 2015. "Market size and pharmaceutical innovation," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 844-871, October.
    27. Conesa, Juan Carlos & Costa, Daniela & Kamali, Parisa & Kehoe, Timothy J. & Nygard, Vegard M. & Raveendranathan, Gajendran & Saxena, Akshar, 2018. "Macroeconomic effects of Medicare," The Journal of the Economics of Ageing, Elsevier, vol. 11(C), pages 27-40.
    28. Amitabh Chandra & Amy Finkelstein & Adam Sacarny & Chad Syverson, 2016. "Health Care Exceptionalism? Performance and Allocation in the US Health Care Sector," American Economic Review, American Economic Association, vol. 106(8), pages 2110-2144, August.
    29. Yunus Aksoy & Henrique S. Basso & Ron P. Smith & Tobias Grasl, 2019. "Demographic Structure and Macroeconomic Trends," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 193-222, January.
    30. Kristopher J. Hult & Sonia Jaffe & Tomas J. Philipson, 2018. "How Does Technological Change Affect Quality-Adjusted Prices in Health Care? Systematic Evidence from Thousands of Innovations," American Journal of Health Economics, University of Chicago Press, vol. 4(4), pages 433-453, Fall.
    31. Chen, Simiao & Kuhn, Michael & Prettner, Klaus & Bloom, David E. & Wang, Chen, 2021. "Macro-level efficiency of health expenditure: Estimates for 15 major economies," Social Science & Medicine, Elsevier, vol. 287(C).
    32. Frankovic, Ivan & Kuhn, Michael & Wrzaczek, Stefan, 2020. "Medical innovation and its diffusion: Implications for economic performance and welfare," Journal of Macroeconomics, Elsevier, vol. 66(C).
    33. Bloom, David E. & Canning, David & Mansfield, Richard K. & Moore, Michael, 2007. "Demographic change, social security systems, and savings," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 92-114, January.
    34. Daron Acemoglu & Veronica Guerrieri, 2008. "Capital Deepening and Nonbalanced Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 116(3), pages 467-498, June.
    35. Robert E. Hall & Charles I. Jones, 2007. "The Value of Life and the Rise in Health Spending," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(1), pages 39-72.
    36. Daniel Bilodeau & Pierre-Yves Crémieux & Brigitte Jaumard & Pierre Ouellette & Tsévi Vovor, 2004. "Measuring Hospital Performance in the Presence of Quasi-Fixed Inputs: An Analysis of Québec Hospitals," Journal of Productivity Analysis, Springer, vol. 21(2), pages 183-199, March.
    37. Aviva Aron-Dine & Liran Einav & Amy Finkelstein, 2013. "The RAND Health Insurance Experiment, Three Decades Later," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 197-222, Winter.
    38. Kelly, Mark, 2020. "Medicare for all or medicare for none? A macroeconomic analysis of healthcare reform," Journal of Macroeconomics, Elsevier, vol. 63(C).
    39. Zhao, Kai, 2014. "Social security and the rise in health spending," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 21-37.
    40. Bhattacharya, Jay & Packalen, Mikko, 2012. "The other ex ante moral hazard in health," Journal of Health Economics, Elsevier, vol. 31(1), pages 135-146.
    41. Michele Boldrin & Ana Montes, 2005. "The Intergenerational State Education and Pensions," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 651-664.
    42. Amy Finkelstein, 2004. "Static and Dynamic Effects of Health Policy: Evidence from the Vaccine Industry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(2), pages 527-564.
    43. Böhm, Sebastian & Grossmann, Volker & Strulik, Holger, 2021. "R&D-driven medical progress, health care costs, and the future of human longevity," The Journal of the Economics of Ageing, Elsevier, vol. 18(C).
    44. Margaret K. Kyle & Anita M. McGahan, 2012. "Investments in Pharmaceuticals Before and After TRIPS," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1157-1172, November.
    45. Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
    46. Kevin M. Murphy & Robert H. Topel, 2006. "The Value of Health and Longevity," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 871-904, October.
    47. Wong, Albert & Wouterse, Bram & Slobbe, Laurentius C.J. & Boshuizen, Hendriek C. & Polder, Johan J., 2012. "Medical innovation and age-specific trends in health care utilization: Findings and implications," Social Science & Medicine, Elsevier, vol. 74(2), pages 263-272.
    48. Amitabh Chandra & Jonathan Skinner, 2012. "Technology Growth and Expenditure Growth in Health Care," Journal of Economic Literature, American Economic Association, vol. 50(3), pages 645-680, September.
    49. 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 251-277, June.
    50. Charles I. Jones & Peter J. Klenow, 2016. "Beyond GDP? Welfare across Countries and Time," American Economic Review, American Economic Association, vol. 106(9), pages 2426-2457, September.
    51. Martin, Stephen & Rice, Nigel & Smith, Peter C., 2008. "Does health care spending improve health outcomes? Evidence from English programme budgeting data," Journal of Health Economics, Elsevier, vol. 27(4), pages 826-842, July.
    52. David M. Cutler & Mark McClellan & Joseph P. Newhouse & Dahlia Remler, 1998. "Are Medical Prices Declining? Evidence from Heart Attack Treatments," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 991-1024.
    53. Eichner, Matthew J, 1998. "The Demand for Medical Care: What People Pay Does Matter," American Economic Review, American Economic Association, vol. 88(2), pages 117-121, May.
    54. Ouellette, Pierre & Vierstraete, Valerie, 2004. "Technological change and efficiency in the presence of quasi-fixed inputs: A DEA application to the hospital sector," European Journal of Operational Research, Elsevier, vol. 154(3), pages 755-763, May.
    55. Cutler, David M. & Huckman, Robert S., 2003. "Technological development and medical productivity: the diffusion of angioplasty in New York state," Journal of Health Economics, Elsevier, vol. 22(2), pages 187-217, March.
    56. Amy Finkelstein, 2007. "The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 122(1), pages 1-37.
    57. Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
    58. Torben M. Andersen & Joydeep Bhattacharya, 2017. "The Intergenerational Welfare State and the Rise and Fall of Pay‐as‐you‐go Pensions," Economic Journal, Royal Economic Society, vol. 127(602), pages 896-923, June.
    59. Jonathan Skinner & Douglas Staiger, 2015. "Technology Diffusion and Productivity Growth in Health Care," The Review of Economics and Statistics, MIT Press, vol. 97(5), pages 951-964, December.
    60. 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.
    61. Zweifel, Peter & Manning, Willard G., 2000. "Moral hazard and consumer incentives in health care," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 8, pages 409-459, Elsevier.
    62. Frankovic, Ivan & Kuhn, Michael, 2019. "Access to health care, medical progress and the emergence of the longevity gap: A general equilibrium analysis," The Journal of the Economics of Ageing, Elsevier, vol. 14(C).
    63. Kelly, Mark & Kuhn, Michael, 2022. "Congestion in a public health service: A macro approach," Journal of Macroeconomics, Elsevier, vol. 74(C).
    64. Weisbrod, Burton A, 1991. "The Health Care Quadrilemma: An Essay on Technological Change, Insurance, Quality of Care, and Cost Containment," Journal of Economic Literature, American Economic Association, vol. 29(2), pages 523-552, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kuhn, Michael & Minniti, Antonio & Prettner, Klaus & Venturini, Francesco, 2023. "Medical innovation, life expectancy, and economic growth," Department of Economics Working Paper Series 342, WU Vienna University of Economics and Business.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frankovic, Ivan & Kuhn, Michael, 2018. "Health insurance, endogenous medical progress, and health expenditure growth," ECON WPS - Working Papers in Economic Theory and Policy 01/2018, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.
    2. Frankovic, Ivan & Kuhn, Michael & Wrzaczek, Stefan, 2020. "Medical innovation and its diffusion: Implications for economic performance and welfare," Journal of Macroeconomics, Elsevier, vol. 66(C).
    3. Ivan Frankovic & Michael Kuhn & Stefan Wrzaczek, 2020. "On the Anatomy of Medical Progress Within an Overlapping Generations Economy," De Economist, Springer, vol. 168(2), pages 215-257, June.
    4. Bloom, David E. & Kuhn, Michael & Prettner, Klaus, 2018. "Health and Economic Growth," IZA Discussion Papers 11939, Institute of Labor Economics (IZA).
    5. Volker Grossmann, 2021. "Medical Innovations and Ageing: A Health Economics Perspective," CESifo Working Paper Series 9387, CESifo.
    6. Kuhn, Michael & Frankovic, Ivan & Wrzaczek, Stefan, 2017. "Medical Progress, Demand for Health Care, and Economic Performance," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168249, Verein für Socialpolitik / German Economic Association.
    7. Kelly, Mark & Kuhn, Michael, 2022. "Congestion in a public health service: A macro approach," Journal of Macroeconomics, Elsevier, vol. 74(C).
    8. Frankovic, Ivan & Kuhn, Michael, 2019. "Access to health care, medical progress and the emergence of the longevity gap: A general equilibrium analysis," The Journal of the Economics of Ageing, Elsevier, vol. 14(C).
    9. Frankovic, Ivan & Kuhn, Michael & Wrzaczek, Stefan, 2016. "Medical care within an OLG economy with realistic demography," ECON WPS - Working Papers in Economic Theory and Policy 02/2016, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.
    10. Chen, Simiao & Kuhn, Michael & Prettner, Klaus & Bloom, David E. & Wang, Chen, 2021. "Macro-level efficiency of health expenditure: Estimates for 15 major economies," Social Science & Medicine, Elsevier, vol. 287(C).
    11. Böhm, Sebastian & Grossmann, Volker & Strulik, Holger, 2021. "R&D-driven medical progress, health care costs, and the future of human longevity," The Journal of the Economics of Ageing, Elsevier, vol. 18(C).
    12. Jeffrey Clemens, 2012. "The Effect of U.S. Health Insurance Expansions on Medical Innovation," Discussion Papers 11-016, Stanford Institute for Economic Policy Research.
    13. Maik T. Schneider & Ralph Winkler, 2021. "Growth and Welfare under Endogenous Lifetimes," Scandinavian Journal of Economics, Wiley Blackwell, vol. 123(4), pages 1339-1384, October.
    14. Daron Acemoglu & Amy Finkelstein & Matthew J. Notowidigdo, 2013. "Income and Health Spending: Evidence from Oil Price Shocks," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1079-1095, October.
    15. David E. Bloom & Michael Kuhn & Klaus Prettner, 2022. "Modern Infectious Diseases: Macroeconomic Impacts and Policy Responses," Journal of Economic Literature, American Economic Association, vol. 60(1), pages 85-131, March.
    16. Charles I. Jones, 2016. "Life and Growth," Journal of Political Economy, University of Chicago Press, vol. 124(2), pages 539-578.
    17. Kuhn, Michael & Prettner, Klaus, 2016. "Growth and welfare effects of health care in knowledge-based economies," Journal of Health Economics, Elsevier, vol. 46(C), pages 100-119.
    18. Olatunji A. Shobande & Lawrence Ogbeifun & Simplice A. Asongu, 2022. "Globalisation, technology and global health," Working Papers of the African Governance and Development Institute. 22/070, African Governance and Development Institute..
    19. Kuhn, Michael & Minniti, Antonio & Prettner, Klaus & Venturini, Francesco, 2023. "Medical innovation, life expectancy, and economic growth," Department of Economics Working Paper Series 342, WU Vienna University of Economics and Business.
    20. Amitabh Chandra & Jonathan S. Skinner, 2011. "Technology Growth and Expenditure Growth in Health Care," NBER Working Papers 16953, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Health care spending; Health insurance; Intergenerational externality; Medical progress; Moral hazard; Overlapping generations;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J17 - Labor and Demographic Economics - - Demographic Economics - - - Value of Life; Foregone Income
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jhecon:v:87:y:2023:i:c:s016762962200131x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505560 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.