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Financial Health Economics

Author

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  • Ralph S. J. Koijen
  • Tomas J. Philipson
  • Harald Uhlig

Abstract

We provide a theoretical and empirical analysis of the link between financial and real health care markets. This link is important as financial returns drive investment in medical research and development (R&D), which, in turn, affects real spending growth. We document a “medical innovation premium” of 4–6% annually for equity returns of firms in the health care sector. We interpret this premium as compensating investors for government‐induced profit risk, and we provide supportive evidence for this hypothesis through company filings and abnormal return patterns surrounding threats of government intervention. We quantify the implications of the premium for the growth in real health care spending by calibrating our model to match historical trends, predicting the share of gross domestic product (GDP) devoted to health care to be 32% in the long run. Policies that had removed government risk would have led to more than a doubling of medical R&D and would have increased the current share of health care spending by more than 3% of GDP.

Suggested Citation

  • Ralph S. J. Koijen & Tomas J. Philipson & Harald Uhlig, 2016. "Financial Health Economics," Econometrica, Econometric Society, vol. 84, pages 195-242, January.
    • Handle: RePEc:wly:emetrp:v:84:y:2016:i::p:195-242
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    6. 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).
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    12. Manning, Mark & Albrecht, Terrance L. & Yilmaz-Saab, Zeynep & Shultz, Julie & Purrington, Kristen, 2016. "Influences of race and breast density on related cognitive and emotion outcomes before mandated breast density notification," Social Science & Medicine, Elsevier, vol. 169(C), pages 171-179.
    13. Frankovic, Ivan & Kuhn, Michael, 2023. "Health insurance, endogenous medical progress, health expenditure growth, and welfare," Journal of Health Economics, Elsevier, vol. 87(C).
    14. Penno, Erin & Gauld, Robin, 2017. "The role, costs and value for money of external consultancies in the health sector: A study of New Zealand’s District Health Boards," Health Policy, Elsevier, vol. 121(4), pages 458-467.
    15. Pattanaporn Chatjuthamard & Sirimon Treepongkaruna & Pornsit Jiraporn & Napatsorn Jiraporn, 2021. "Does firm‐level political risk influence corporate social responsibility (CSR)? Evidence from earnings conference calls," The Financial Review, Eastern Finance Association, vol. 56(4), pages 721-741, November.
    16. M. Kabir Hassan & M. Sydul Karim & Tarun Mukherjee, 2023. "Does corporate diversification retrench the effects of firm‐level political risk?," The Financial Review, Eastern Finance Association, vol. 58(4), pages 663-702, November.
    17. Mark Pauly & Kyle Myers, 2016. "A Ricardian-Demand Explanation for Changing Pharmaceutical R&D Productivity," NBER Working Papers 22720, National Bureau of Economic Research, Inc.
    18. Stig Vinberg & Elisabeth Hansen & Marianne Hedlund & Bodil J. Landstad, 2017. "Ambiguity among Managers in Small-Scale Enterprises: How to Handle Business and Workplace Health Management," Societies, MDPI, vol. 7(4), pages 1-17, November.
    19. Chen, Zhanhui & Yang, Bowen, 2019. "In search of preference shock risks: Evidence from longevity risks and momentum profits," Journal of Financial Economics, Elsevier, vol. 133(1), pages 225-249.
    20. Gyimah, Daniel & Danso, Albert & Adu-Ameyaw, Emmanuel & Boateng, Agyenim, 2022. "Firm-level political risk and corporate leverage decisions," International Review of Financial Analysis, Elsevier, vol. 84(C).
    21. Janssen, W.H.P., 2015. "Essays in financial reporting, tax, and politics," Other publications TiSEM 4d9fd983-7774-43d8-9a74-e, Tilburg University, School of Economics and Management.
    22. Chak Hung Jack Cheng & Nopphol Witvorapong, 2021. "Health care policy uncertainty, real health expenditures and health care inflation in the USA," Empirical Economics, Springer, vol. 60(4), pages 2083-2103, April.
    23. Nammouri, Hela & Chlibi, Souhir & Labidi, Oussama, 2022. "Co-movements in sector price indexes during the COVID-19 crisis: Evidence from the US," Finance Research Letters, Elsevier, vol. 46(PA).
    24. 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).

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    • G0 - Financial Economics - - General
    • I0 - Health, Education, and Welfare - - General

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