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The Contribution of Personal
Health Services to Longevity,
Population Health and
Economic Growth
Link between Health and Economic
Sectors

 Economists show links between (1) flows of funds
and (2) flows of goods and services. These can be
linked to the health sector.
 Allocations to health care one of the allocation
decisions—affects quantity and mix of resources
available for health care.
 Investments in health care in turn affect growth of
economy
Fig. 16.1. Links between Health and
Economic Sectors
Economic Sector
1
○
2
○
Health Care
Financing (Input)
4
○
3
○
Population Health
(Output)
Health Sector
= Flow of dollars
= Flow of goods and services
= Feedback connection
1. Affecting macroeconomic outcomes
2. Boosting economic performance
3. Increasing employment and income
4. Changing disease patterns
Funds Flows from Economic Sector
Components

 Out-of-pocket spending by individuals
 Private health insurance
 General tax revenue
 Earmarked tax revenue
Relationship between Improved Health
and Longevity and Economic Growth

 Two important questions:
(1) How much of the long-term gains in population
health can be attributed to provision of personal health
care services?
(2) What are the major pathways through which
health gains boost economic performance?
Some Research Suggests That Spending on
Health Care has Minor Impact on Economic
Growth

 Rand Health Insurance Experiment: little effect of
health insurance on personal health, but
observational period short
 There is much more variation in share of GDP
devoted to health care than there is variation in
personal health among countries.
 Text disagrees that little effect of health care on
economic growth for several reasons.
Why Evidence on Previous Slide
May be Misleading

 There are many dimensions of personal health, not
only mortality.
 There are important lags between investments in
health and the return on such investments—takes
decades for many such investments to yield return.
 Other factors affect health outcomes, not just per
capita GDP.
Longitudinal and Time Series
Studies

 These studies show impacts of health care use on health
outcomes and other outcomes
--effects of health care on demographic structure—
people are productive for longer, which in turn influences
work hours and labor productivity per hour; when healthier
people learn more while in school.
--reductions in infant and preschool child mortality
decrease numbers of births per women in child-bearing
ages.
Effects of Health Care Financing on
National Economies: Savings Behavior

 Reduced precautionary savings when people are
covered by health insurance. Why? Effects on
macroeconomy? Precautionary savings inefficient
way for household to protect against expenditure
risk. Why so?
 Crowding out of private savings, private health
insurance, and work when public means-tested
health insurance, e.g., Medicaid, provided. Explain
why this is so.
Effects of Health Care Financing on
National Economies: Labor Market
Outcomes

 Employer-based health insurance and “job lock.”
What is job lock and why does it represent a source
of inefficiency in an economy?
 Effects of employer-provided health insurance
coverage on personal retirement decisions
 Effects of provision of employer-provided health
insurance as a fringe benefit on wage compensation
 Effects of such insurance on labor force participation
rate of women
Effects of Health Care Financing on
National Economies: Welfare Loss of
Taxation

 Two sources of general tax revenue: (1) direct taxes, e.g.,
personal and corporate income taxes; and (2) indirect
taxes, e.g., excise taxes.
 Direct taxes on personal income create deadweight loss
through distortion of labor supply decision. Why?
 Excise taxes affect individuals’ consumption choices
because consumption is taxed relative to other choices,
e.g., savings, consumption of goods and services not
subject to the excise tax. Consumer’s work–leisure choice
distorted as well.
 Empirical evidence
Fig. 16.2. Excess Burden of an Indirect
Tax
$
Discussion of Fig. 16.2

 Since the sum of losses in consumer surplus and
producer surplus (A+B+C+D) exceeds the amount of
revenue collected (A+C), there is deadweight loss in
amount (B+D).
 Summers (1989): Increase of $1 in tax revenue leads
to deadweight loss from $1.07-$1.33.
Deadweight Loss and Payroll Tax

 Most countries collect revenue for health insurance
from payroll tax
 Impact of payroll tax on economic activity depends
on tax incidence, i.e., who bears the tax
 Is the tax shifted forward to consumers in the form
of higher product prices? Forward shifting
 Is the tax shifted backward to employees in the form
of lower compensation? Backward shifting
 Is the tax cost absorbed by employers? No shifting
Empirical Evidence on Payroll Tax
Shifting

 Most research indicates backward shifting—thus,
little/no adverse impact of payroll tax on
employment levels
Secular Trends in Expenditures on
Personal Health Care Services

 At single point in time, there is considerable
variation in health expenditures among OECD
countries, both in levels and as percent of GDP.
 Trends in expenditures are similar among OECD
countries.
Determinants of Personal Health
Expenditures (Countries)

 National income (most important determinant)
 Population aging
 Increased health insurance coverage (related to
national income changes)
 Technological change—but hard to quantify
Hall and Jones (2007): Perhaps Countries
Like the U.S. Are Not Spending Too
Much on Health After All.

 Theory: marginal utility of consumption of goods
and services other than health declines with
increased consumption. After all, one does not get
that much utility out of the third big screen TV or the
14th trip in a year.
 But the marginal utility of health care services do not
decline. More services increases longevity. So there
are more periods during which to consume other
goods and services. Hence, there is good reason that
more affluent countries spend more of health
services.
Secular Trends in Health
Outcomes

 At single point in time, there is substantial variation
in life expectancy among OECD countries.
 Life expectancy has increased in almost all countries.
 There is appreciable variation in life expectancy
within countries—health disparities.
Determinants of Mortality

 Cutler et al (2006) attributed longevity gains to
improvements in (1) nutrition. (2) public health, and
(3) vaccination and medical treatment.
 Authors emphasized important role of technological
change in health improvements.
Contributions of Personal Health Care
Services to Improved Population Health:
Conceptual Framework

 Health production function as described in Chapter 2
 See Fig. 16.3.
 “Process” versus “product” innovations in general
and applied to health care
Fig. 16.3. Health Production Function
in a Static and Dynamic Context

Output (Health)
C
H2
Health gains due to
technology change
B
H1
H0
0
C’
Health Production Function at
Period 1: H(M; 1)
A
M0
Health Production Function at
Period 0: H(M; 0)
Health gains due to
medical input
M1
Input (Health Care)
Contributions of Personal Health Care
Services to Improved Population Health:
Empirical Evidence

 Auster et al. (1969)
 Rand HIE
 Data from 175 countries. Figs. 16.4 and 16.5: get
different shapes of production function for highversus low-income countries
Fig.16.4. The Relationship between Annual
Health Expenditures Per Capita Population and
Health Outcomes in High-Income Countries
Life Expectancy
85
80
75
70
65
60
55
50
45
40
0
1000
2000
3000
4000
Health
5000 Expenditure
Sources: Data for annual health expenditures and life expectancy are from World Bank Development Indicators (The World Bank Group. 2009). Both health
expenditures and life expectancy at birth are for the year 2000 and health expenditures are measured in constant 2000 US dollars.
Note: High-income countries indicate countries with a GDP per capita greater than the 50th percentile of world income distribution.
Fig.16.5. The Relationship between Health
Expenditures per Capita Population and Health
Outcomes in Low-Income Countries
Life Expectancy
80
75
70
65
60
55
50
45
40
35
0
20
40
60
80
100
120
140
Health
Expenditure
Sources: Data for health expenditures and life expectancy are from World Bank Development Indicators (The World Bank Group. 2009). Both health
expenditures and life expectancy at birth are for the year 2000 and health expenditures are measured in constant 2000 US dollars.
Note: Low-income countries indicate countries whose GDP per capita are less than 50th percentile of world income distribution.
Attributing Health Improvements to
Technological Change: Methodological
Approaches

 Quantifying influence of technological change on
health and longevity is challenging task
 3 approaches
--Disease approach: analysis of data on individuals
focusing on single disease or therapeutic procedure
--Proxy variable approach: find a proxy variable for
technological change such as cumulative number of
new drugs available
--Accounting method
Disease Approach

 Case studies for e.g. heart attack treatment, treating
low-birthweight infants, breast cancer
 Treatment substitution versus treatment expansion
effects
 Skinner et al. (2006) evidence that benefits from
treatment for a specific disease may decrease over
time
Proxy Approach

 Methodological problems
--quantifying health overall (more difficult than
when dealing with a single disease)
--selecting an adequate proxy
--omitted variables bias
 Applications
Accounting Method

 Parse out effect of health care technological change
on health improvement from the other factors that
led to health improvement
 Example: Cutler et al. (2006): Concluded that > 40%
of longevity gain in the U.S. attributable to
technological change in medicine
Contribution of Improved Health
to Economic Growth

Direct Effect on Productivity

 Bhargava et al. (2001) used aggregate data on adult survival
rates (ASRs) to measure health and estimate impact of change
in ASR on economic growth. Found a positive effect of ASR on
growth, but not consistent patterns.
 Bloom et al. (2004) used life expectancy as proxy for health.
Found that each extra year of life expectancy leads to increase
in national output of 4%.
 Jamison et al. (2004) also found effect but found that stock of
physical capital and educational attainment of country’s
population had larger effects on economic growth.
 Weil (2007) studied gaps in national income between rich and
poor countries. Concluded that health differences explained
10% of national income gap.
Indirect Effects Operating through
Fertility, Education, and Saving

 If children more likely to die, parents tend to have
more children so that they will have family support
when old.
 When children have a higher probability of reaching
adulthood, there is greater incentive for families to
invest in children’s education.
 With longer period of expected retirement, families
save more during pre-retirement for consumption
during retirement years.
Other Indirect Effects

 Good health during children may lead to more
creativity in adulthood.
 Improved child and maternal health may improve
children’s ability to cope with stress and adapt to
new technology as adults.
 Countries with higher levels of population health
tend to have lesser income inequality.
Contested Issues

 Health affects economic activity but economic
activity may also affect health, but this not always so,
e.g., China before and after 1978.
 Are health differences among countries becoming
smaller or larger?
Health Sector as Job
Machine

 Health sector a major employer
 Channels: (1) demand for labor to work in health
sector a derived demand; (2) countries promote
health industries, e.g., pharmaceutical manufacturer
as source of employment with products traded
globally
Economic Growth and
Disease Patterns

 With economic growth comes reductions in death
caused by respiratory and digestive diseases
 In high-income countries which have experience
above reductions historically, see reductions in
deaths due to diseases of nervous system and sense
organs (e.g., multiple sclerosis, Parkinson’s disease,
stroke); and heart and circulatory conditions over
time
Unemployment and Health

 Ruhm (2000): health improves as unemployment
increases.
 See Fig. 16.6.
 Why this relationship?
--time prices fall during recession, lowers price of
health investments
--fewer work-related accidents during recessions
Fig. 16.6 Total Mortality and
Unemployment Rates in the United States
Source: Ruhm (2000)