Health Economics

April 11, 2014
Michael Grossman of City University of New York's Graduate Center and Theodore Joyce of Baruch College, Organizers

Darius Lakdawalla, University of Southern California and NBER; Anup Malani, University of Chicago and NBER; and Julian Reif, University of Illinois at Urbana-Champaign

The Insurance Value of Medical Innovation

Technological change in health care is often viewed as a major contributor to increased financial risk since new technologies are often more expensive than old ones. While true in a static sense, this viewpoint overlooks the manner in which medical innovations reduce the health risks borne by consumers. First, using the parlance of Ehrlich and Becker (1972), therapeutic technologies serve as "self-insurance" that lowers the impact of illness and preventative technologies serve as "self-protection" that lowers the probability of illness. Second, given the incompleteness of real-world financial markets, medical technologies improve the performance of health insurance markets ("market insurance") that transfer wealth across morbidity states. Lakdawalla, Malani, and Reif show that standard methods of valuing medical technologies overlook these insurance benefits from technology. As a result, standard approaches may underestimate the value of medical technology that improves quality of life, and may under- or overestimate the value of preventive technologies. Using data from the Tufts Cost-Effectiveness Registry, the authors estimate total insurance values for a range of real-world medical technologies. They find that this insurance value adds about 100 percent to the traditional valuation. Moreover, for typical levels of risk aversion, the insurance value of technology is significantly larger than the insurance value of health insurance itself. The authors' findings have important implications for the assessment and reimbursement of new health care technologies and, in particular, they suggest that conventional valuations of technologies that address unmet needs or treat severe illnesses are too low compared with therapies treating milder disorders.

Jason Hockenberry, Emory University and NBER; Jesse Margolis, City University of New York; Shin-Yi Chou, Lehigh University and NBER; and Michael Grossman

Moral Hazard and Less Invasive Medical Treatment for Coronary Artery Disease: An Analysis of Smoking in the National Health Interview Survey

Over the last several decades, numerous medical studies have compared the effectiveness of two common procedures for coronary artery disease: percutaneous coronary intervention (PCI), and coronary artery bypass graft (CABG). Most evidence indicates that CABG-the more invasive procedure - leads to superior long-term outcomes for otherwise similar patients, though there is little consensus as to why. Hockenberry, Margolis, Chou, and Grossman propose a novel explanation: patient offsetting behavior. The authors hypothesize that patients who undergo the more invasive procedure, CABG, are more likely to improve their behavior-eating, exercise, smoking, and drinking - in a way that increases longevity. To test their hypothesis, the authors use Medicare records linked to the National Health Interview Survey to study one such behavior: smoking. They find that CABG patients are 12 percentage points more likely to quit smoking in the one-year period immediately surrounding their procedure than PCI patients, a result that is robust to numerous alternative specifications.

Tom Chang, University of Southern California; Joshua Graff Zivin, University of California at San Diego and NBER; and Tal Gross and Matthew Neidell, Columbia University and NBER

Particulate Pollution and the Productivity of Pear Packers (NBER Working Paper 19944)

Chang, Graff Zivin, Gross, and Neidell study the effect of outdoor air pollution on the productivity of indoor workers at a pear packing factory. They focus on fine particulate matter (PM2.5), a harmful pollutant that easily penetrates indoor settings. They find that an increase in PM2.5 outdoors leads to a statistically and economically significant decrease in packing speeds inside the factory, with effects arising at levels well below current air quality standards. In contrast, the authors find little effect of PM2.5 on hours worked or the decision to work, and little effect of pollutants that do not travel indoors, such as ozone. The effect of outdoor pollution on the productivity of indoor workers suggests a thus far overlooked consequence of pollution. Back-of-the-envelope calculations suggest that nationwide reductions in PM2.5 from 1999 to 2008 generated $19.5 billion in labor cost savings, which is roughly one-third of the total welfare benefits associated with this change.

Robert Kaestner, University of Illinois and NBER, and Cuiping Long, University of Illinois at Chicago

Effects of Prescription Drug Insurance on Hospitalization and Mortality: Evidence from Medicare Part D

Kaestner, Long, and Alexander examine whether obtaining prescription drug insurance through the Medicare Part D program affected hospital admissions, expenditures associated with those admissions, and mortality. They use a large, geographically diverse sample of Medicare beneficiaries and exploit the natural experiment of Medicare Part D to obtain estimates of the effect of prescription drug insurance on hospitalizations and mortality. Results indicate that obtaining prescription drug insurance through Medicare Part D was associated with an 8 percent decrease in the number of hospital admissions, a 7 percent decrease in Medicare expenditures, a 12 percent decrease in total resource use, and no significant change in mortality.

Dalton Conley, New York University and NBER; David Cesarini and Christopher Dawes, New York University; and Benjamin Domingue and Jason Boardman, University of Colorado

Socio-demographic and Genetic Aspects of Educational Attainment do not Moderate Each Other

Conley, Cesarini, Dawes, Domingue, and Boardman exploit the findings from a recent large genome-wide association study of educational attainment to construct a genetic score designed to predict educational attainment. Using data pooled from two independent samples, they deploy this genetic risk score in models for educational attainment in order to test the hypotheses offered by prior researchers that social structure constrains genetic expression for individuals with low socioeconomic status. In contrast to this prior twin-based research, the authors find that genetic effects are not moderated by sociodemographic variables such as parental education, age, or gender. In fact, the effect of offspring genotype appears to be moderated by maternal genotype, suggesting that prior evidence of gene-by-environment interaction may have actually been gene-gene effects. These findings are consistent with the existence of two parallel systems of ascription: genetic inheritance, and social inheritance. However, the authors caution that at the presently attainable levels of explanatory power these results are preliminary and may change when better powered genetic risk scores are developed.

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