Handbook of Health Economics

Handbook of Health Economics

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Product Details

ISBN-13: 9780444535931
Publisher: Elsevier Science
Publication date: 12/05/2011
Series: Handbook of Health Economics , #2
Sold by: Barnes & Noble
Format: NOOK Book
Pages: 1152
File size: 14 MB
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About the Author

Mark Pauly is Bendheim Professor, Professor of Health Care Management, Professor of Business and Public Policy, Professor of Insurance and Risk Management, and Professor of Economics at the Wharton School of Business, University of Pennsylvania.
Thomas McGuire is a Professor of Health Economics in the Department of Health Care Policy at Harvard Medical School and a Research Associate at the National Bureau of Economic Research. His research focuses on the design and impact of health care payment systems, the economics of health care disparities, and the economics of mental health policy and drug regulation and payment. McGuire has contributed to the theory of physician, hospital, and health plan payment. McGuire was a co-editor of the Handbook of Health Economics Volume 2 (2012) and recently completed ten years as an editor of the Journal of Health Economics.
Pedro Pita Barros is the 2005 winner of the "Grande-Oficial da Ordem do Infante D. Henrique," awarded by the President of Portugal. He is Editor-in-Chief of the journal "Economia da Saude - Conceitos e Comportamentos."

Read an Excerpt


North Holland

Copyright © 2012 Elsevier B.V.
All right reserved.

ISBN: 978-0-444-53593-1

Chapter One

Health Care Spending Growth

Michael E. Chernew and Joseph P. Newhouse

Contents 1. Introduction 2 1.1. Spending Growth in the US 2 1.2. Spending Growth in Other Countries 4 2. Spending Growth vs. Spending Level 5 3. Technology and Spending Growth 7 4. Models of Spending Growth 10 4.1. Models with Exogenous Technology 10 4.1.1. Managed Care and Spending Growth 10 4.1.2. Income Effects and Spending Growth 11 4.2. Models of Endogenous Technology 12 5. Empirical Evidence 17 5.1. Causes of Spending Growth 17 5.2. Spending Growth by Insurance Type 26 5.3. Spending Growth by Disease/Health Status 34 6. Value of Spending Growth 36 7. Conclusion 37 References 38


This chapter provides a conceptual and empirical examination of health care spending growth (as opposed to the level of health care spending). Given that an equilibrium spending level exists, spending growth requires some variable to change. A one-time change in such a variable (or a one-time policy intervention) will generate a new equilibrium spending level, though the length of the transition period will depend on switching costs and information lags. After the new equilibrium is established, spending growth will cease. Yet we observe persistent spending growth. This implies at least one continually changing variable and the variable most commonly identified as continually changing is medical technology, broadly defined. We review theoretical models related to spending growth, including some that treat technology as exogenous and others that treat technology as endogenous. We then review the empirical literature related to spending growth and medical technology.

Keywords: spending growth; inflation

JEL Code: I19 (Health, Other)


This chapter provides a conceptual and empirical examination of spending growth. The benefits associated with rising health care spending are undoubtedly crucial for societal well-being. Nonetheless, policy makers across the globe are increasingly concerned with the growing burden that such spending places on the private sector and public coffers. Even countries with a low share of GDP currently devoted to health care will eventually be overwhelmed by health care spending growth if such spending rises faster than income for a prolonged period—as in fact it has historically. Although we focus on the American context, many if not most of the issues related to spending growth are similar in all countries.

1.1. Spending Growth in the US

For decades, high health care spending growth (relative to income growth) has been a feature of health care systems in all developed countries. In the United States, which devotes a larger share of GDP to health care than any other country (17.6 percent in 2009), inflation adjusted per capita health expenditures have increased from approximately $809 in 1960 to $7,375 in 2009 (Figure 1.1), an average annual growth rate of approximately 4.7 percent (Centers for Medicare & Medicaid Services, 2011b).

While spending growth in the US has varied over time, it has consistently exceeded income growth (Table 1.1). The share of each decade's income growth devoted to health care has ranged from 5 to 42 percent. On average, the annual gap between real per capita health spending growth and real per capita GDP growth in the US from 1970 to 2009 has been about 2.2 percentage points (Centers for Medicare & Medicaid Services, 2011b). Recent projections suggest that total health care spending will consume 19.6 percent of the US GDP by 2019 (Sisko et al., 2010). Even if the gap between income and health spending growth shrinks to 1 percentage point, about 40 percent of the growth in GDP between 2010 and 2050 will be devoted to increased health care spending, compared with about 20 percent during the 1980s and 1990s (Chernew et al., 2009a). The 2011 CMS Trustees Report forecasts that under current law Medicare alone will represent 5.6 percent of GDP by 2035 and 6.3 percent by 2080 (Centers for Medicare & Medicaid Services, 2011a). In a more realistic alternative scenario, which takes into account likely changes in current law, CMS estimates Medicare will represent 5.9 percent of GDP by 2030 and 10.4 percent by 2080 (Centers for Medicare & Medicaid Services and Department of Health and Human Services, 2010). In 2009 Medicare accounted for 20 percent of US health care spending.

Although the increased spending on health care has brought health benefits, financing that growth has generated substantial concern among private and public payers as well as many other stakeholders (Cutler, 2004; Ford et al., 2007; Hall and Jones, 2007). For example, the growing share of public budgets allocated to health care has serious consequences for fiscal policy. Peter Orszag, the former Director of the Office of Management and Budget and Congressional Budget Office (CBO), has testified before Congress that the United States' long-term fiscal balance will be determined primarily by the future rate of health care spending growth (Congressional Budget Office, 2007). Analysis in 2007 by the CBO suggested that financing even a 1 percentage point gap between income and health spending growth without cutting other public programs would require an increase in taxes of more than 70 percent by 2050, which, if financed entirely by proportionately raising all individual income tax rates, would bring the highest marginal tax rate to 60 percent and have broad adverse economic ramifications (Congressional Budget Office and Orszag, 2007).

High and rising health care costs also threaten the viability of private and public institutions providing health insurance. Historically, in the US the gap between growth in health care spending and income has been associated with a decline in insurance coverage for the non-elderly (Kronick and Gilmer, 1999; Chernew et al., 2005a and b). This reflects the inability of employers to shift increases in health care spending to wages for lower paid employees and the failure of public coverage to offset declines in private coverage.

The Patient Protection and Affordable Care Act of 2010 includes mandates to purchase insurance and subsidies to assist some households in doing so. This will likely dampen the relationship between spending growth and the deterioration of coverage, assuming the subsidies keep pace with future increases in health care spending (on both the extensive and intensive margins). Of course, the subsidies are financed through taxes, so the costs of maintaining widespread coverage, which are ultimately financed by households and individuals in their role as taxpayers, will rise if health care spending continues to rise. If, alternatively, this escalating spending growth in the non-elderly population is not accompanied by increased subsidies, the financial burden on individuals will rise, either directly through higher premiums and cost sharing at the point of service or indirectly through lower wages and pension benefits that their employers will be willing to pay. Moreover, without rising subsidies compliance with a coverage mandate will fall with more rapid spending growth.

1.2. Spending Growth in Other Countries

Spending growth is not a uniquely American problem. The past century has seen rapid and steady growth in health care spending in most modern industrial democracies, irrespective of how health care is financed and organized. Real per capita annual growth in health care spending in national currency units from 1970 to 2008 and the excess over GDP growth is given in Table 1.2.

Importantly, the results of comparisons of health care spending growth are sensitive to the years of data in consideration as well as the unit of measurement. During 1970–2008 the real per capita annual spending growth in the United States was only slightly (0.3 percentage points) above the average of these countries and the US ranked 14 out of 21 OECD countries. In later years, however, the United States has moved up in this list. From 1980 to 2007 the United States growth rate (3.9 percent) was greater than all but three OECD countries (Spain, Ireland, and Portugal) and the average was 3.2 percent (Organization for Economic Co-Operation and Development (OECD), 2009).


At time t the level of spending, St, is by definition the product of a vector of unit prices, Pt, and the associated quantities, Qt. This accounting identity holds no matter how prices and quantities are determined. We begin with the elemental observation that prices and quantities in health care are determined by the interaction among patients, providers, payers, and government. Furthermore, we regard the interaction as leading to prices and quantities being in equilibrium at time t. We mean "equilibrium" in the conventional economic sense, defined broadly to include political as well as private sector actors: parties are following behavioral rules given the circumstances they face, and, given the variables they consider exogenous, they are content not to change their behavior. We are not claiming any welfare properties for the resulting equilibrium (i.e. we do not claim it to be efficient or fair). The key point is simply that an equilibrium exists. As a result, health care quantities and prices, and thus spending, will not change if exogenous factors, such as population composition, do not change.

In other words, given an equilibrium at time t, spending growth requires some variable that causes the equilibrium spending level to change. A one-time change in such a variable will, under standard assumptions, generate a new equilibrium, though the length of the transition period will depend on switching costs and information lags. After the new equilibrium is established, spending growth would cease. Yet we observe persistent spending growth. This implies at least one continually changing variable (or an implausibly long transition period that robs the meaning of equilibrium of any practical significance). As discussed below, the changing variable that the literature has focused on is often identified as "technology." Continual introduction of technology could generate persistent spending growth, although it leaves open the question of the degree to which economic conditions affect the continual change in technology; i.e. the degree to which technological change is endogenous.

A key distinction is between the level of spending and the rate of spending growth. A variable that changes the equilibrium but does not continually change will generally not affect long-run spending growth; rather it will simply generate a new equilibrium. As a result, variables that are correlated with the level of spending (i.e. the equilibrium at a point in time) are not necessarily related to the rate of spending growth. For example, an area's proportion of primary care physicians is strongly negatively correlated with its level of spending at a point in time (Starfield et al., 2005; Sepulveda et al., 2008), but not correlated with an area's rate of spending growth (Chernew et al., 2009b).


Excerpted from Handbook of HEALTH ECONOMICS Copyright © 2012 by Elsevier B.V.. Excerpted by permission of North Holland. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents

1. Medical Spending Growth

2. Geographic Variation in Spending and Outcomes

3. Health Behaviors and Prevention

4. Health Economics of Economic Development

5. Demand for Health Insurance and Health Care

6. Demand for Health Care

7. Issues in Cost Effectiveness Cost Benefit and Cost Utility Analysis

8. Cost Effectiveness and Payment Policy

9. Competition in Health Care Supply

10. Reporting on and Paying Health Care Providers

11. Health Insurance, Health Plans and Risk Variation

12. Markets for Pharmaceutical Products

13. Intellectual Property, Information Technology, Biomedical Research and Marketing of Patented Products

14. Medical Workforce

15. Public and Private Sector Interface

16. Equity in Health and Health Care

17. Health Care Disparities

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