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.


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?

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.

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?

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