In a diverse set of investigations, researchers at EF are assessing the role of the health care system in improving health, longevity and wellbeing while keeping track of the macroeconomic implications. A particular focus lies on the role of medical progress as a driver of increasing health care effectiveness.

Much of our modelling relies on a detailed representation of how households adjust their health care utilization and consumption/saving choices in response to changes in the supply of health care. Thus, we are carefully picking up on demand-supply-side feedback in general equilibrium; complementarities, trade-offs and externalities over time; as well as endogenous system responses, e.g. in regard to the incentives to invest in medical R&D or curb health care congestion.

Health insurance, endogenous medical progress, health expenditure growth, and welfare

We study the impact of health insurance expansion on medical spending, longevity and welfare in an OLG economy in which individuals purchase health care to lower mortality and medical progress is profit-driven. Three sectors are considered: 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 the development of the US economy/health care system from 1965 to 2005 and study numerically the impact of the insurance expansion. 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 subsidization of health care through health insurance creates excessive health care spending, the gains in life expectancy brought about by induced medical progress more than compensate for this.

Congestion in a public health service: A macro approach

To study the trade-offs and the macroeconomic repercussions of rising health care demand in a public health service, we develop a continuous-time overlapping generations model with a public health care sector and a realistic aging process. Health care services are provided to two groups of individuals, the healthy and the sick, free of charge at the point of service. Without a price mechanism, the government relies on a queuing rule for allocating its services. We conceptualize this mechanism as congestion that lowers the efficacy of health care. Then, we calibrate the model to match UK data from 2007–2016 and analyze the steady-state, general equilibrium response of the economy of shocks to productivity/income and medical effectiveness. Our analysis suggests that the optimal response to an increase in the demand for health care depends strongly on whether it is due to an increase in income or medical effectiveness. We also show that there is disagreement across age-groups on the preferred policy.

Kelly, M. & Kuhn, M. (2022). Congestion in a public health service: A macro approach. Journal of Macroeconomics 74 e103451. 10.1016/j.jmacro.2022.103451.

Medical Progress, Aging, and Sustainability of Health Care Finance

This chapter explores the relationship among medical progress, ageing, and healthcare spending and summarizes what is known about the joint dynamics and their drivers and about the consequences for the sustainability of healthcare finance,  economic performance, and ultimately welfare. Evidence from diverse strands of empirical research and theoretical analysis reveals strong complementarity and joint causation among medical progress, ageing, and healthcare spending and a strong  influence of income growth and institutional structure on the dynamic process. The findings support a view that, despite manifold inefficiency involved in the process, the simultaneous growth of longevity and healthcare spending can be viewed as a  welfare improvement. Further work is needed to explore the role of medical progress in exacerbating inequality in health outcomes, the role of healthcare institutions as important mediators, a potentially stabilizing role of income on healthcare spending growth, and what new forms of medical advances based on digitalization imply for healthcare spending and the ageing process.

Kuhn, M. (2023). Medical Progress, Aging, and Sustainability of Health Care Finance. In: The Routledge Handbook of the Economics of Ageing. Eds. Bloom, D.E., Souza-Posa, A., & Sunde, U., pp. 61-83 London, UK: Routledge. ISBN 978-036771-332-4 10.4324/9781003150398-5.