Health insurance, endogenous medical progress, and health expenditure growth

Ivan Frankovic and Michael Kuhn

No 01/2018, ECON WPS - Working Papers in Economic Theory and Policy from TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit

Abstract: We study the impact of health insurance expansion in the US on health expenditure, longevity growth and welfare in an overlapping generations economy in which individuals purchase health care to lower mortality. We consider three sectors: final goods production; a health care sector, selling medical services to individuals; and an R&D sector, selling increasingly effective medical technology to the health care sector. We calibrate the model to match the development of the US economy/health care system from 1965 to 2005 and study numerically the impact of the insurance expansion on health expenditures, medical progress and longevity. We find that more extensive health insurance accounts for a large share of the rise in US health spending but also boosts the rate of medical progress. A welfare analysis shows that while the moral hazard associated with subsidized health care creates excessive health care expenditure, the gains in life expectancy brought about by induced medical progress more than compensate for this. By mitigating an intergenerational externality associated with the longevity benefits from current medical innovation the expansion of health insurance constitutes a Pareto improvement.

Keywords: life-cycle model; health care spending; health insurance; medical progress; moral hazard; overlapping generations (search for similar items in EconPapers)
JEL-codes: D15 I11 I12 I18 J11 J17 O31 O41 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-age, nep-dge, nep-hea and nep-ias
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/177369/1/101787610X.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuweco:012018

Access Statistics for this paper

More papers in ECON WPS - Working Papers in Economic Theory and Policy from TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().