Based mostly on a examine by Frankovic and Kuhn (2022), the reply is each. Nevertheless, the worth of elevated innovation–as measured by means of longevity beneficial properties–greater than offset inefficiencies from overspending. Particularly, the authors use an overlapping generations mannequin the place people should buy medical health insurance and medical progress is determined by well being care sector return on funding. The authors calibrate their mannequin utilizing longevity knowledge from the Human Mortality Database from 19650 by means of 2005, earnings knowledge from the Present Inhabitants Survey (CPS) and well being care spending knowledge from the Nationwide Heart for Well being Statistics (NCHS). This time-frame is related as 1965 was the yr Medicare was applied within the US.
Utilizing this system, the authors discover that:
…extra in depth medical health insurance accounts for a big share of the rise in US well being spending but additionally boosts the speed of medical progress. A welfare evaluation reveals that whereas the subsidization of well being care by means of medical health insurance creates extreme well being care spending, the beneficial properties in life expectancy caused by induced medical progress greater than compensate for this.
Total, elevated ranges of medical health insurance lower consumption as more cash is spent on well being care. On the similar time, capital–significantly capital invested in R&D–will increase as medical health insurance will increase returns on funding as extra sick sufferers are capable of afford therapy. The authors observe that:
One clarification for why the advantages from medical progress more and more outweigh the loss from ethical hazard lies with the continued progress of earnings: So long as per capita consumption is rising over time, people are inclined to assign an rising worth to life (Corridor and Jones, 2007, Chen et al., 2021). This argument extends to the evaluation of ethical hazard, the place people are keen to tolerate an rising distortion from well being insurance coverage in alternate for a rise in lifetime, so long as this solely slows down however doesn’t reverse consumption progress.
The authors additionally observe that medical costs improve over time because of the Baumol price illness; particularly the joint impression of productiveness progress within the remaining items sectors and medical progress itself result in greater costs.
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