This project has received funding via the EUI Research Council call 2024.
In developed countries, we observe substantial income growth since the industrial revolution and, with some time lag, the increase of life expectancies. However, the modern medical sector starts growing only about 100 years later. In the first part of this research project, we develop a framework to explain these global facts accounting for government intervention in healthcare markets during WWII. A key element of our theory is an endogenous growth model. As demand for health increases, technological change rises in the health sector. Health is heterogeneous in the population. In the second part, we will quantitatively study welfare implications of redistributive healthcare policies.
Over the last 200 years, remaining life expectancy of a twenty-year-old individual has increased by more than 20 years across developed economies. Per capita income has risen. An increasing share of that income has been spent on health goods. During the 20th century, developed economies have further seen the emergence and growth of a modern health sector. In 2020, the health sector accounts for more than 10% of output and employment and 20% of income spent in the US, a common phenomenon across developed economies.
The research project is concerned with first understanding and jointly explaining the secular trends in life expectancy, income per capita and the modern health sector. The main objective is to next apply that understanding to ask how redistributive policies in the healthcare market affect welfare – e.g., a fundamental health care reform that redistributes resources in health care financing from the income rich to the income poor (e.g., a citizen’s insurance in Germany, Obamacare in the US).
Research in this project will be conducted jointly with Dirk Krueger (University of Pennsylvania), Leon Huetsch (University of Bonn), Nicolo Russo, and Jana Riepenhausen (both Goethe University Frankfurt). More researchers will join the team. This proposal provides an overview of this multi-year project.
As key mechanism, we will take into account that distributive policy reforms affect growth of the health sector in the long-run, creating a dynamic efficiency-redistribution trade-off, because new goods in a health care sector are invented through spending on R and R is crowded out if a redistributive policy diminishes demand by the income rich. These efficiency losses lead to losses also for the income poor in the population in the long-run, because affordable modern health goods become available at a lower speed.
Ultimately, we will study this trade-off in various contexts of healthcare reforms. E.g., while universal public coverage can equalize access to health care services across households, thereby increasing welfare among current generations, it may result in less overall healthcare spending, which will reduce long-run growth in the health sector. The quantitative structural model of health care will thus be ideally suited to, for example, investigate the question whether private health insurance is a growth engine and to investigate the consequences of reducing its power.
We initially focus on the US when empirically documenting the motivating sectoral trends over the last 200 years and when calibrating our model to match those. This choice is motivated by the relatively large amount of health care spending, R spending, and innovation activity in the US health care sector. Moreover, more data is available for the US, particularly micro data on household health spending across different age, income, and wealth groups. However, we aim at drawing general lessons that hold across developed economies with similar institutional setups. We also focus on studying policy reforms of relevance for developed economies, e.g., how governments should respond to increasing health expenditures due to demographic change.
In a first step, the project is concerned with building a macroeconomic model to connect the increase in life expectancy to the simultaneous rise in income and rationalize the emergence and growth of the modern health sector. The model is built on the insight that demand for health has increased over time as individuals have become richer and older. The increase in health spending has in turn sparked a reallocation of labour and capital towards the production of health goods, and a reallocation of R spending towards the innovation of new health goods.
The quantitative macroeconomic model will be calibrated and cross-validated with micro data, and will be applied to speak to the two-way feedback between the societal and economic megatrends of (model endogenous) demographic change and inequality, and the characterization of optimal economic policy. The model will feature a distribution of households along the dimensions of income, wealth and health and will make predictions on how this distribution evolves over time. The endogenous directed growth channel will describe how resources allocated to the final or the modern health goods sector will differentially affect growth across these sectors giving rise to the afore described dynamic efficiency-redistribution trade-off of health care policy reforms.