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Insurance for health: Incentives to overspending or innovation?


According to Frankovic and Kuhn’s study (2022), both. However, the value of increased innovation–as measured through longevity gains–more than offset inefficiencies from overspending. The authors employ an overlapping generation model in which individuals can buy health insurance, and medical progress is dependent on the return on investment in the health care sector. The authors calibrate the model using data from the Human Mortality Database, which covers the period 19650 to 2005. They also use earnings data from Current Population Survey and National Center for Health Statistics (NCHS) data regarding health care spending. This is important because 1965 was when Medicare was first implemented in the US.

This methodology is used by the authors to find:

…more extensive health insurance accounts for a large share of the rise in US health spending but also boosts the rate of medical progress. Welfare analysis shows that even though the subsidization of healthcare through insurance causes excessive health care spending and increases in life expectancy, it is more than offset by the increased quality of life due to induced medical improvement.

Consumption is lessened by higher levels of insurance.

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