Medical Care Costs How Much Welfare Loss Joseph

Medical Care Costs: How Much Welfare Loss Joseph P. Newhouse

Increase of Medical Expenditure p p Growth in health care > Growth in GNP The share of health care in GNP increases over time.

p Now the health industry in U. S. is about 3 trillion… p $3, 000, 000

Increase of Medical Expenditure p p p Growth in health care > Growth in GNP The share of health care in GNP increases over time. The public is concerned about the growth of health care expenditure

Interview with Jonathan Gruber p p p http: //thebrowser. com/interviews/jonathan-gruber-onpublic-finance What are the two or three most important questions that public finance economists have not answered but need to? I like to say there are only two problems we have to worry about in America – healthcare spending and global warming because either one puts us underwater.

p How we control healthcare costs is probably the number one problem for public finance economists and everyone in the world has to grapple with, because if we don’t control healthcare costs we’ll be bankrupt.

Factors accounting for Medical Exp Increase p p p Ageing Increased insurance Increased income Supplied induced demand Factor productivity in a service industry

Ageing p Population mix changes over time n n Aged over 65: 8% (1950) to 12% (1987) Aged below 19: 33% (1950) to 28% (1987)

Ageing p Increase on Med Expenditure n n 15% increase the actual increase is 500%

Increased Insurance p p The spread of insurance reduces the price and increases the demand Issue of moral hazard

Increased Insurance p Rand experiment n n p Average coinsurance moves from 33% to 0% increases the spending by 40 -50% price elasticity is -0. 1 to -0. 2 Increase on Med expenditure n n n Average coinsurance rate: 67% (1950) to 27% (1980) the increase in Med Exp is around 50% No change on hospital co-payment but the increase in hospital expenditure is 50% in 1980 s

Increased Income p Income elasticity n n p Income elasticity in U. S. is 0. 2 -0. 4 Income elasticity in the world is around 1. 0 Increase on Med Exp in the world n n n Between 1940 -1990, real GNP increases by 180% Increase in health is 35 -70% if elasticity is 0. 2 -0. 4 Increase in health is 180% if elasticity is 1

Supplier Induced Demand p Physicians want more demand, even at the cost of patients n n Number of physicians increases, increase the demand to protect their incomes Number of physicians over time do not increase very much

Factor productivity in a service industry p p p Medical care is a service which is difficult to import or export If the productivity gains for services are lower like the medical care than the rest of the economy, then relative medical prices would rise over time. Demand is inelastic, so the expenditures would also rise.

Factor productivity in a service industry p p The medical price inflation exceeds the CPI by 3. 4% in 1980 s, but 0. 4% in 1970 s, 2. 0% in 1960 s, and 1. 9% in 1950 s. No clear evidence indicating that medical price inflation is very different from CPI. More importantly, price index for medical care is measured with strong bias, most notably is the problem of failing to make adjustments of quality change over time.

Items Change % of Total % of Health Heath Growth Explained Growth in Same Periods Part Ageing (65 above） 8%(1950) 12%(1980) +15% 500% 3. 75% Insurance expansion 67%(1950) 27%(1980) +50% 500% 12. 5% Income growth 1940 -90 成長 180% +180% 780% 23% Induced demand minor - Price effect minor -

p About 50% is still unexplained…

Conclusions p p About 50% is still unexplained… Technology innovation is considered the important factor that attributes to the growth of medical expenditure

Benefit of Medical Care

Cost and benefit analysis/Cutler (2004) p Medical costs n n 1950：＄500 2000：＄4500

p Medical benefits? n n Live longer Live better