Becker Friedman Institute
for Research in Economics
The University of Chicago

Research. Insights. Impact. Advancing the Legacy of Chicago Economics.

Harnessing Theory and Data to Assess Health Care Markets

Inaugural conference

The availability of large, easily accessible datasets allows ready economic analysis of the healthcare sector today. However, with the trend toward data-crunching, we are missing the benefits of deeper, more innovative research approaches, says Tomas Philipson, director of the Becker Friedman Institute’s Health Economics Initiative.

Philipson co-organized The Health Sector and the Economy, the initiative’s first conference, in hopes of promoting research that features an empirical bent but also brings theory and insights to thinking anew about health care. He considers this complementary analytical approach a hallmark of the Chicago tradition—an approach he says is not “being amplified” in the field.

In the area of health economics, “the profession has become very analytic. There is a lag in new ideas or new conceptual predictions,” said Philipson. “The Chicago school is essentially about having predictions about things that matter, theoretical work that has an impact on what we care about, and empirical work that informs which predictions or theories are more important.”

The interplay between theory and empirical work is the hallmark of classic Chicago price theory, which Philipson and his co-organizer, Professor of Economics Casey Mulligan, view as a powerful but overlooked means for investigating market forces within the complex health sector. They highlighted several papers presented at the conference that advance this approach, using new data sources to look at fundamental questions about public vs. private care models, competition, and costs and benefits of medical innovations.

Public-Private Comparisons

Liran Einav of Stanford University presented preliminary work that investigates how health care spending varies across two primary systems of funding care for the elderly: Medicare, which is the traditional public system, and Medicare Advantage (MA), a popular hybrid program that incorporates private plans with Medicare payment support. Einav analyzed aggregated claims from Aetna, Humana, and United Healthcare, an opportunity he likened to opening “a black box.” Einav found that healthcare spending in MA is lower by approximately 27 percent per person per month, compared to Medicare. This difference appears to hold steady across types of patients and services provided.

Because prices were similar, Einav suspects lower spending was driven by MA enrollees who substituted for cheaper services and perhaps because the plans or doctors were helping enrollees manage toward lower-priced care options. The research is some of the first to show a side-by-side market comparison of Medicare and MA.

Martin Gaynor of Carnegie Mellon University used a large dataset of privately-insured patients to gain some of the first glimpses into how the private insurance market and Medicare compare. Gaynor looked at health care spending and hospital prices across more than 300 hospital referral regions. He finds that for privately-insured patients, spending varies dramatically within and across hospital regions—by as much as 300 percent. Variations in price across hospital referral regions appear to contribute to this.

Notably, Gaynor showed the spending variation for Medicare patients was influenced not by price variation but by the quantity of services available. This difference is an important caveat, Gaynor argues, when comparing health spending insights from one system to the other. His work also revealed the importance of hospital market structure to pricing and spending: where hospital regions had fewer competitors, he shows they charged prices that were as much as 15 percent higher.

Cost-Benefit Analysis

Sonia Jaffe, a postdoctoral scholar with the Becker Friedman Institute, looked at the question of whether health care innovations, which are often very expensive, deliver meaningful benefits to patients and to the system when compared with the existing standard of care. Jaffe analyzed data from more than 6,000 health care innovations in one of the first analyses to look broadly across the health sector, rather than a narrow view within a single disease or drug category.

Her analysis introduces the economic framework of quality-adjusted prices. This metric reveals the relationship between the additional expense of a new treatment and the additional time of improved or extended life per year.

Her preliminary findings show that quality-adjusted prices after the introduction of innovations jumped by about 68 percent over the previous care standard. However, over time, Jaffe showed that prices may fall as the market recalibrates after the introduction of the innovation. New competitors emerge and drive prices downward. Jaffe suggests that price declines of just 4 percent from one round of an innovation to the next could be enough to offset the differences in most instances.

Beyond Prices

Mulligan presented research using a series of preliminary models to understand how price ceilings function in competitive health care markets when insurers are forced to find ways to compete other than price. The models parse the attributes of healthcare products so that any benefit or attribute that is not price, such as the waiting time in a doctor’s office, becomes an aspect of quality. Mulligan’s research suggests, among other findings, that a price ceiling may end up benefiting producers on average because it could soften consumer’s attitudes toward quality just enough to fill excess supply. For example, when a certain condition has a maximum doctor visit price associated with it, patients may vary in the length of time they are willing to wait in a doctor’s office.

Andrew Lo, Massachusetts Institute of Technology, closed the conference with an update on his research that explores new tools for financing health care innovations. Because it can cost as much as $ 2 billion to develop a cure, the number of investors and drug companies willing to take such risks has dwindled. Lo has been investigating financial instruments that pool independent trials and finance them together. His preliminary research suggests this solution could lead to successful treatments while also providing a favorable rate of return to investors. Lo discussed his work in this area earlier this year at an institute event. 

The conference overall marked an important step in expanding health care analysis, according to Mulligan. “It was an excellent demonstration of how so many areas of economics that are not officially ‘health’ have much to contribute to our understanding of the sector,” he said.

— Jennifer Roche