Tuesday, July 25, 2006


Are We Missing Something?

Is the growth of medical technology driving the cost of healthcare? Are increases caused by overutilization? How much impact are prescriptions having?

Amy Finkelstein, an Assistant Professor of Economics at MIT, has released new research on the Health Insurance market that seeks to answer a fascinating question: Has the expansion of health insurance itself increased the cost of healthcare? The research will be published in an upcoming issue of Quarterly Journal of Economics, but a copy is already available on Amy's website. From Insurance Newsnet:
As a percentage of gross domestic product, U.S. health expenditures grew from 5% in 1960 to 16% in 2004, notes MIT economist Amy Finkelstein, whose research observes that this trend has accompanied a rise in insurance coverage. While less than half of all medical expenditures were covered by insurance in 1960, by the year 2000, that figure had grown to 80%.

Finkelstein isn't the first to study the two accompanying trends, yet most research -- dating back to the landmark Rand Corp. Health Insurance Experiment in the 1970s -- traditionally has estimated the effect of insurance on rising health-care costs to be small, accounting for no more than one-eighth of the growth. Among the largest randomized controlled experiments ever attempted in the United States, the Rand study found little difference in the health choices made by individuals who were assigned to various kinds of health insurance plans, with varying degrees of cost-sharing. But Finkelstein's research found that the proliferation of health insurance may account for nearly half of the rise in health care spending.
An analyst from the Congressional Budget Office is already praising Finkelstein's research yet fine tuning her conclusions. By correctly weighting Medicare's impact according to spending rather than population, Phillip Ellis from the CBO cuts Finkelstein's 50 percent to 25 percent. Still, twenty five percent of a $1.8 trillion dollar increase over 50 years is quite significant.

Ultimately the results make sense though. We cannot make fundamental changes to how healthcare is delivered without changing how much care itself costs (it's actually not unlike the Observer Effect in science). Regardless, it is still a fascinating paper and could effect how we address rising premiums.

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