NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Economic Analysis of Risk and Uncertainty induced by Health Shocks: A Review and Extension

Tomas J. Philipson, George Zanjani

NBER Working Paper No. 19005
Issued in April 2013
NBER Program(s):   HE

We review and extend the economic analysis of risk and uncertainty as it relates to behavior mitigating health shocks. We summarize some central aspects of the vast positive and normative literature on the role of various forms of insurance that attempt to smooth consumption, which can be uneven due to medical spending induced by health shocks. Much of this literature has been concerned with the barriers that prevent full insurance and the role of the government eliminating their adverse consequences. We argue that this large literature is limited in that it is focused largely on consumption smoothing rather than smoothing of health itself. However, a problem with insuring health itself is that human capital cannot be traded; a person diagnosed with an incurable cancer cannot be made whole through reallocation of someone else’s health. This lack of tradability in human capital implies that pooling of health risks, through private or public insurance, is infeasible except in rare instances such as transplantations. We argue that medical innovation can be interpreted as an insurance mechanism for a population’s health. By enabling treatment of a harmful disease, it completes the previously incomplete market for risk-sharing in health by pooling the health care spending risk. In a sense, medical innovation involves a current certain R&D payment for a reduced future price of health, which is directly comparable to traditional health care insurance where a current premium is paid for a future reduced price of health care. We explore the positive and normative implications of this “health insurance” view of medical R&D and stress the ex ante value of new medical innovations, sometimes for patients that may never even use them. Given the potentially large value of smoothing health itself rather than consumption, we argue that more explicit analysis is needed on the relative value of public programs stimulating medical innovation versus health care reforms largely aimed at enabling consumption-smoothing.

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Information about Free Papers

You should expect a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19005

Users who downloaded this paper also downloaded these:
Currie and MacLeod w18977 Diagnosis and Unnecessary Procedure Use: Evidence from C-Section
Comin and Mestieri w19010 If Technology Has Arrived Everywhere, Why has Income Diverged?
Agarwal and Whalley w19006 China and India: Reforms and the Response: How Differently have the Economies Behaved
Kim and Petrin w19011 Tests for Price Endogeneity in Differentiated Product Models
Chatterji, Glaeser, and Kerr w19013 Clusters of Entrepreneurship and Innovation
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us