• On what do health economists agree?

    Recently, I found myself trying to think of as many positive (as opposed to normative) statements I could that I thought most health economists would agree with about the economics of health care. “Economics” of health care is broader than just spending and cost and encompasses all the areas of health care studied by the discipline, including quality, choices, outcomes, etc.

    The following is my own list, but it is informed by the literature on this subject, and by “literature” I mean Baicker and Chandra (2008), Morrisey and Cawley (2008), and Fuchs (1996). I think most health economists would agree with these stylized facts:

    • Uncertainty about the timing of need for health care is the reason for health insurance.
    • Insurers have an incentive for favorable selection.
    • Insurance markets suffer adverse selection.
    • Insured people use more care.
    • Insured people have better health outcomes.
    • Health insurance does not guarantee good health care.
    • Preventive care does not usually pay for itself.
    • Employees pay for all employer-based health benefits; they offset wages or other benefits.
    • Favorable tax treatment of employer-based health benefits leads to greater employer offers and more generous benefits.
    • Employer-based plans serve a risk pooling function.
    • Cost sharing reduces utilization.
    • Physicians influence patients’ level of utilization.
    • Technological change is the primary driver of increasing health care spending.
    • Level of educational attainment affects health.
    • Horizontal and vertical integration in the health sector occurs in pursuit of market power.
    • Income inequality worsens health.
    • Shortfalls in revenue from one payer do not cause hospitals to raise prices to another.

    What do you think is missing from this list? Do you disagree with any items on this list? What are some important questions health economics hasn’t largely settled?


    • I’d probably rephrase: “Income inequality worsens health.”

      It’s not inequality, in and of itself, that worsens health. That is, someone making 10 times what I make, and that factor increasing each year won’t worsen my health.

      Probably more accurate to say that “poverty worsens health.”

      Even still, it’s not clear that it is causal in and of itself. It seems to necessitate an asterisk: “poverty, insofar as it limits access to adequate health care, worsens health.”

      But maybe I’m just nitpicking.

    • Two more:

      Fee-for-service payment increases the amount of health care provided, compared to bundled payment mechanisms.

      Healthcare providers respond to financial incentives.

      Also, I think there’s an important debate on the *degree* to which “insured people have better health outcomes.”

      • Agreed. I think there is a debate about degree on a lot of these. Some hold more or less depending on circumstances. To boil them down to a few words each, they necessarily become stylized and nuance-free.

    • Regarding your comment above, There is evidence of an association between absolute poverty, as the commenter describes, as well as relative poverty or inequality. The two are distinct. The former is referred to as “the gradient”, the latter is “the gap.” See Richard Wilkinson’s work on topic.

      Your definition of “most” becomes important when discussing the type of consensus you seek. There are still a fair number of economists arguing over the causal direction re: the gap and the gradient.

      One additional item for your list – Health care utilization and spending are influenced by the regional supply of health care resources.

      This regional effect is separate from the physician effect you have listed.


    • I’m not a health care economist, but as a provider I would say that Richardson’s second statement trumps his first. (I agree with both). Providers do respond to financial incentives. In FFS, the incentive is to do more and thereby make more money.

      I am not as familiar with the literature on cost-shifting (your/Austin’s) last point. I will leave that up to others to argue.

      Great post!

    • I was talking to a health economist friend a few days ago who said that “the United States has a lot of physicians” both “relative to other countries” and in “an absolute sense.” Does anyone know if health economists have a general consensus on the “doctor shortage” that is always talked about?

      I know that this is a vague question. As someone going to medical school next year, I find it hard to parse out the politics in discussion about this. Recent discussion on this blog, in AcademyHealth and in the Washington Post leave me feeling more uncertain about where the U.S. is with respect to the optimal number of physicians. The apparent consensus that we face a doctor shortage seems a bit like “received wisdom” to me.

      • Your friend would be wrong. The US lags on this measure, as they do on most.

        • Unfortunately, physicians per capita is not an entirely useful metric for your question. Given technology, delivery structures, etc. a physician in the US might be more efficient than a physician elsewhere. This metric also doesn’t tell us much about primary care vs speciality, and plenty of other considerations. From what I understand, the US likely has an allocation problem less so than a doctor shortage. Improvement in technology and delivery (using medical teams or increasing scope of NP and PA, who have comparable outcomes to primary care docs) will shift the need for number of physicians. Frankly, I would like to see less specialists and better allocation. If you are interested, I would be happy to post relevant lit after work, current on a phone.



    • I mostly agree, although I agree that there are many important nuances lost due to space, but it’s important to caveat with “within the confines of a private insurance” system such as in the US. It’s still a very thought-provoking list.

      That aside, I’m musing over “Preventive care does not usually pay for itself”. Do you mean that the cost is less than the cost of NOT doing preventative care (at all) in the long run? “Usually” is probably the tricky word there; but since without it the sentence is clearly false (there must be SOME preventive care that is cost effective), I think this one may need tweaking. Maybe “Often” instead of “Usually”? Do you have a reference that guarantees more than half the time this is true?

      • Upon further thought, I believe I was thinking of a more narrow definition of “Preventive care” than is commonly used, so I nod in agreement again.

    • Fantastic list. Only one where I’m not certain I agree (and largely out of insufficient information, not a contradictory belief) is “Technological change is the primary driver of increasing health care spending.” If you mean that the effects of changing treatment patterns dominate the effects of increasing burden of disease, aging, &c., I think it’s probably right (and would welcome data showing that – all I’m aware of is e.g. CBO’s “excess cost growth” projections). That conclusion could also (perhaps) be upset by really good data on lifestyle changes and how they affect the burden of disease, but it seems unlikely (and also stretches the definition of causation to look at too distant a counterfactual).

      As for questions with broad disagreement, I would go for “What causes variation in treatment patterns?” and “What percentage of health care utilization is ineffective or harmful?” Lack of data is a huge barrier on the latter, but both also seem deeply tied up in our priors –

      Would be very interesting to get a panel of health economists together and test these predictions, like the UChicago IGM forum does…

    • Employer-based plans serve a risk pooling function. True, but not an effective risk pooling function, as employees of a single employer are, in general, more alike than different, which is the opposite of an effective risk pool.

    • I would agree with all except for the last two:

      1.) I’m not exactly sure through which channels income inequality would reduce health. If you are referring to the simple fact that lower income people have less access to care, it would be more accurate to say that poverty or low income worsens health. Still, there are significant causality issues here, and whether or not correlation exists is even in dispute. I would say there is at least some significant disagreement among economists here.

      2.) This is certainly true in a competitive market. However, not all markets are competitive. The health care market isn’t particularly competitive. My sense is that there is at least some disagreement about this matter, for legitimate reasons.

      I would also only agree with provisos with the claim that education affects health. It certainly does, but there is a great deal of uncertainty, at least from what I have read, about exactly how and how much it affects health.

      Likewise, I’m not sure I would call technology the “primary” driver of health spending growth. If the word “primary” was changed to “major”, I would agree without provisos.

    • Which source supports the statement “Preventive care does not usually pay for itself”?

      • A NEJM reported summary of the preventive interventions in the Tufts Cost-Effectiveness Analysis Registry showed that only about 15% of reported clinical interventions showed both improved outcomes and reduced cost:

        I believe even the VA’s smoking cessation program doesn’t show a savings unless you look outside of the health care sector and include things like productivity. I can’t seem to find that study now, though.

        • The article I linked to is about preventive clinical interventions, not clinical interventions in general.

    • “Preventative care does not usually pay for itself,” is questionable, to me.

      The first issue is the short time horizons of American health care. Does preventative care pay for itself over a lifetime? I would argue that pre-natal care resulting in healthy babies could save phenomenal amounts of money over the lifetime of the child, as in preventing fetal alcohol syndrome. Yet, in the American system, no one entity (except the parents and the individual) benefits for a lifetime.

      The second issue is whether what currently passes for preventative care is effective or necessary. Do healthy 20 somethings need annual physicals from a doctor? Does it count as preventative care if the doctor weighs a patient and tells them they should lose weight? Or would more effective preventative care be a more intensive program that in more successful at reducing weight.

      • My understanding is that vaccines and pre-natal care are just about the only type of preventive care that actually save much money, at least unless the preventive care is narrowly focused on high-risk populations. That comes mostly from conversations with doctors and not a review of literature, but I’ve seen little here or elsewhere to suggest otherwise.

    • 1) Insurance shifts money from the healthy to the less healthy.

      2) Neither public nor private insurers have been able to slow the rate of increase in health care costs to sustainable levels.

      3) Even physicians w/o financial incentives over order tests and perform procedures.


    • It’s a good list, with a few quibbles. Uncertainty over timing of health care needs is certainly A major reason for insurance, but I think the ability to fund unexpected and large medical costs is an equally important reason.

      As for technology driving rising costs, there are probably equally good cases to be made that a lack of market competition/price sensitivity and/or the aging population are primarily driving costs.

      Regarding cost-shifting, I haven’t read enough yet to be persuaded it doesn’t occur, but an important caveat may be that while cost shifting doesn’t occur based on payer, it does occur based on treatment type – i.e. highly-profitable orthopedic surgery subsidizes the ER.

    • Volume outcome relationship?

    • After spending some time with the MEPS data base I would suggest rewording….

      Insured people have better health outcomes.


      Unhealthy insured people have better health outcomes.

      Sending a healthy patient to a bad doctor who needs to bill tests and treatments to pay for his boat will not always lead to a good outcome…

    • Is there a consensus that medically unproductive care, care that is ineffective or no more effective than cheaper alternatives, makes a meaningful contribution to the cost of care?

    • Great list. I would add:

      • Income level influences course of treatment (whether a back surgery or physical therapy is prescribed is greatly impacted by a physician’s assumptions about an individual’s ability to pay.)

      In addition to “Cost sharing reduces utilization,” I’d add:

      • Cost sharing improves market efficiency and reduces pricing. (Consumers have a greater incentive to rationally consume.)

      In the last bullet, “Shortfalls in revenue from one payer do not cause hospitals to raise prices to another,” are you limiting that assertion solely to the difference amongst private payers? Because I find it hard to believe that when the government clamps down on the reimbursement levels in Medicare and Medicaid, it is not accompanied by a bulge in pricing to private insurers.

    • I am not too sure about the “Employees pay” due to Employers passing the cost on. It seems counter-intuitive, since you would expect that it would be dependent on the elasticity. I tried researching this a while ago and the articles I found indicated that some 50% to 80% would be passed on to the employees.

    • Let’s see, we could add:

      Economies based on competition and markets always outperform centrally directed economies – a call for central control and planning is a call for stagnation.

      Healthcare markets are local (except that medical device and pharmaceutical markets are national and even worldwide).

      Respect for the concepts of freedom and self-government calls for regulation of local markets (when needed) by state governments rather than a single, central authority – you know, like the Europeans do it (at least they get this point right).

      I would also disagree with the last fact (relating to cost-shifting). Morrisey assumes that all hospitals in a market can accept some Medicare patients while rejecting others. Not bloody likely – if we take away the assumption, his argument falls apart.

      • The research of Professor Elinor Ostrom regarding “Governing the Commons,” Cambridge University Press,1990 and “Understanding Institutional Diversity,” Princeton University Press, 2005 (among several other books) describe the basis of decentralized governance for successfully managing a finite resource without exhausting it. The availability within our nation’s economy to support healthcare is a finite resource. The body of her research confirms your assertions, especially if the central governement is coersive rather than collaborative.

      • “Economies based on competition and markets always outperform centrally directed economies”
        Dubious. Some degree of government control seems to work better than fully free markets.Looking back over the fast few decades, both China and Japan grew at high speed while mostly government controlled.

    • To offer a fairly broad one that is somewhat neglected not just in this post but on the blog more generally:

      Individuals’ health behaviors (ie eating habits, sexual practices, smoking, etc) respond to incentives.

      • Not sure I agree with this. I’ve always found it implausible that “health care costs” could motivate someone to take better care of themselves – if illness, disability and early death aren’t motivating, I don’t think money will be either.

        • As it happens, this NBER paper popped up in my email just now: http://www.nber.org/papers/w19143

          Result: prices of unhealthy foods are causing obesity in children.
          From the abstract:
          “Our findings suggest that increases in the real price of one calorie in food for home consumption and the real price of fast-food restaurant food lead to improvements in obesity outcomes among youths. We also find that an increase in the real price of fruits and vegetables has negative consequences for these outcomes. Finally, our results indicate that measures of PBF [percentage body fat] derived from BIA [bioelectrical impedance analysis] and DXA [dual energy x-ray absorptiometry] are no less sensitive and in some cases more sensitive to the prices just mentioned than BMI [body mass index].”

      • I agree with the next commenter about people should be incentivized through fear of illness, disability, and death.
        They also should be incentivized through being healthy enough to do good deeds and make our world a better place.
        Not only should consumers be motivated; they should be educated.
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        A $25,000 deductible lowers traditional premiums by 60%.
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    • “Insured people have better health outcomes”

      What do you mean by that?

      Do you mean that insurance has a positive impact (causal effect) on health outcomes?, if that is the case, I do not agree. Although there are some rigorous evidence in the US that insurance sometimes may have a positive impact on health outcomes (for example, the recent paper on Oregon health insurance experiment that found better self-reported health for the insureds, http://qje.oxfordjournals.org/content/127/3/1057.short), the evidence around the world, and particularly in developing countries, is strikingly mixed.

      If you do not mean a positive impact but only that, on average, insured people are healthier than the non-insured, your list has a contradiction because a couple of bullets above you included in your list that “Insurance markets suffer adverse selection”.

    • I disagree with several of these on some level. I think generally, though, they’re pretty good. Here are my complaints.

      Insurers have an incentive for favorable selection. I would say they do so when they are not free to set their own prices. If they were free to set their own prices, I suspect the landscape would change.

      Technological change is the primary driver of increasing health care spending. Like was said before, I’m not convinced it’s the primary cause. I would agree it’s a driver.

      Level of educational attainment affects health. I would agree that they’re associated. This statement implies that it’s a cause.

      Income inequality worsens health. This has been discussed.

      Shortfalls in revenue from one payer do not cause hospitals to raise prices to another. You have linked to a paper on this before, but that paper has failed to convince me. At this point, I’m unsure.

    • I am not sure about these two:

      Uncertainty about the timing of need for health care is the reason for health insurance.

      Income inequality worsens health.

      I would add that economists agree that health care apart from trauma care, vaccinations, antibiotics and a few other inexpensive things have little effect on health. I.e. most expensive healthcare yields very small benefit. The margin is very large.

      I would change this:
      Level of educational attainment affects health.

      Level of educational attainment strongly correlates with health.

      • Whoa!

        I can think of many expensive procedures that give huge benefits. The kid I knew born with a heart valve defect. He needed new heart valves every 5-10 years when growing up. My grandmother had a hip replacement that gave her 15 years of mobility. Cancer treatment.

    • The World Health Organization http://www.who.int in 1975 defined Primary Health Care as follows. It “…is essential health care made universally accessible to individuals and families in the community by means acceptable to them, through their full participation and at a cost that the community and country can afford. It forms an integral part of both the country’s health system of which it is the nucleus and of the overall social and economic development of the country.” Given this definition, I would add the following to the list:

      An effective and effcient healthcare industry requires Primary Health Care that is universally accessible by each citizen.

      With a less than authoritative assessment, I perceive that the Australian Healthcare Industry mirrors this definition most closely, of the developed nations of the world.

    • I am wondering if most economists would agree with the following statement: Much of clinical medicine is a luxury item.

        • “Technological change is the primary driver of increasing health care spending.”

          Sorry, but the empirics simply are not available to affirm or deny that point.

          That is not to say that there is not consensus around said point, but that if so, that consensus is founded upon guesswork, preconceptions, and whiteboard fun.

    • Economists may agree that employees pay for health benefits, but a great many rank and file citizens disagree — based on the evidence of their senses.

      There may well be an error in the way I am going to formulate this, but here goes:

      1. Joe Smith teaches accounting at an established university.
      He is paid $60,000 plus a tax free health insurance policy worth $10,000.

      2. Mary Jones has identical credentials but no standard academic job at this time.

      She applies to teach online with the University of Phoenix.

      They pay $60,000 and offer no health insurance whatsoever.

      According to what professional economists assert, Mary should be offered about $73,000 (to account for taxes on the amount she will use for health insurance. In that case, Joe would be paying for his benefits.

      This is repeated all over the economy. Look at what a unionized truck driver makes versus an independent who has to buy their own health insurance. You will NEVER convince these guys that employees are paying for their benefits.

      My suspicion is that the analysis of who pays for benefits has to somehow figure in bargaining power.

      I would welcome anyone trying to refute the evidence I have just presented.

      • It is true that it is very difficult to know what you are worth at your job. Your marginal product of labor is obscured by many things and thus you will not know if two jobs with the same title are really the same in productivity. My guess is that the underlying value of jobs people are comparing is changing and that is why things do not add when people compare the compensation packages. In your example, I would say that while their credentials are the same, the job and its value are different since a degree from a university is worth more, demand is higher, making the pay higher. It also true that a union will be able to raise compensation through bargaining power. Sorry I wouldn’t say this is evidence but does it connect?

      • I agree with you, Bob, that there is a lot of evidence that employees don’t always “pay” for their benefits. In your example of Joe and Mary, perhaps Mary has a spouse whose employer provides family coverage, and so she doesn’t mind not receiving benefits from her employer as it leaves her no worse off. It is the existence of these people that makes it possible for some employers to not offer coverage with little consequence. It may be a bit harder for them to find employees, but they are still able to.

    • A couple more:
      1) The insurance and hospital markets are not competitive (HHI>1800) in most areas.
      2) Market power (or power differentials) results in higher prices for insurance and hospital care.

      These relate to the “It’s the Prices” material you have discussed.

    • To K Marq:

      Thanks for your comment.

      Maybe it makes more sense to say that the university job for Joe is a $70,000 job, and he gets $10,000 of that amount in health insurance.

      Mary’s job is a $60,000 job.

      I suppose that what puzzles me that when economists say that emploiyees are paying for their benefits, that very phrase makes it sound like a penalty to the employee.

      Instead, most people with employer health insurance are the best off workers in the country. Some penalty!

    • btw didn’t mean to be snarky. Great list!!!!