Sam Watson’s journal round-up for 12th February 2018

Every Monday our authors provide a round-up of some of the most recently published peer reviewed articles from the field. We don’t cover everything, or even what’s most important – just a few papers that have interested the author. Visit our Resources page for links to more journals or follow the HealthEconBot. If you’d like to write one of our weekly journal round-ups, get in touch.

Tuskegee and the health of black men. The Quarterly Journal of Economics [RePEc] Published February 2018

In 1932, a study often considered the most infamous and potentially most unethical in U.S. medical history began. Researchers in Alabama enrolled impoverished black men in a research program designed to examine the effects of syphilis under the guise of receiving government-funded health care. The study was known as the Tuskegee syphilis experiment. For 40 years the research subjects were not informed they had syphilis nor were they treated, even after penicillin was shown to be effective. The study was terminated in 1972 after its details were leaked to the press; numerous men died, 40 wives contracted syphilis, and a number of children were born with congenital syphilis. It is no surprise then that there is distrust among African Americans in the medical system. The aim of this article is to examine whether the distrust engendered by the Tuskegee study could have contributed to the significant differences in health outcomes between black males and other groups. To derive a causal estimate the study makes use of a number of differences: black vs non-black, for obvious reasons; male vs female, since the study targeted males, and also since women were more likely to have had contact with and hence higher trust in the medical system; before vs after; and geographic differences, since proximity to the location of the study may be informative about trust in the local health care facilities. A wide variety of further checks reinforce the conclusions that the study led to a reduction in health care utilisation among black men of around 20%. The effect is particularly pronounced in those with low education and income. Beyond elucidating the indirect harms caused by this most heinous of studies, it illustrates the importance of trust in mediating the effectiveness of public institutions. Poor reputations caused by negligence and malpractice can spread far and wide – the mid-Staffordshire hospital scandal may be just such an example.

The economic consequences of hospital admissions. American Economic Review [RePEcPublished February 2018

That this paper’s title recalls that of Keynes’s book The Economic Consequences of the Peace is to my mind no mistake. Keynes argued that a generous and equitable post-war settlement was required to ensure peace and economic well-being in Europe. The slow ‘economic privation’ driven by the punitive measures and imposed austerity of the Treaty of Versailles would lead to crisis. Keynes was evidently highly critical of the conference that led to the Treaty and resigned in protest before its end. But what does this have to do with hospital admissions? Using an ‘event study’ approach – in essence regressing the outcome of interest on covariates including indicators of time relative to an event – the paper examines the impact hospital admissions have on a range of economic outcomes. The authors find that for insured non-elderly adults “hospital admissions increase out-of-pocket medical spending, unpaid medical bills, and bankruptcy, and reduce earnings, income, access to credit, and consumer borrowing.” Similarly, they estimate that hospital admissions among this same group are responsible for around 4% of bankruptcies annually. These losses are often not insured, but they note that in a number of European countries the social welfare system does provide assistance for lost wages in the event of hospital admission. Certainly, this could be construed as economic privation brought about by a lack of generosity of the state. Nevertheless, it also reinforces the fact that negative health shocks can have adverse consequences through a person’s life beyond those directly caused by the need for medical care.

Is health care infected by Baumol’s cost disease? Test of a new model. Health Economics [PubMed] [RePEcPublished 9th February 2018

A few years ago we discussed Baumol’s theory of the ‘cost disease’ and an empirical study trying to identify it. In brief, the theory supposes that spending on health care (and other labour-intensive or creative industries) as a proportion of GDP increases, at least in part, because these sectors experience the least productivity growth. Productivity increases the fastest in sectors like manufacturing and remuneration increases as a result. However, this would lead to wages in the most productive sectors outstripping those in the ‘stagnant’ sectors. For example, salaries for doctors would end up being less than those for low-skilled factory work. Wages, therefore, increase in the stagnant sectors despite a lack of productivity growth. The consequence of all this is that as GDP grows, the proportion spent on stagnant sectors increases, but importantly the absolute amount spent on the productive sectors does not decrease. The share of the pie gets bigger but the pie is growing at least as fast, as it were. To test this, this article starts with a theoretic two-sector model to develop some testable predictions. In particular, the authors posit that the cost disease implies: (i) productivity is related to the share of labour in the health sector, and (ii) productivity is related to the ratio of prices in the health and non-health sectors. Using data from 28 OECD countries between 1995 and 2016 as well as further data on US industry group, they find no evidence to support these predictions, nor others generated by their model. One reason for this could be that wages in the last ten years or more have not risen in line with productivity in manufacturing or other ‘productive’ sectors, or that productivity has indeed increased as fast as the rest of the economy in the health care sector. Indeed, we have discussed productivity growth in the health sector in England and Wales previously. The cost disease may well then not be a cause of rising health care costs – nevertheless, health care need is rising and we should still expect costs to rise concordantly.


“Health is bad for you. That’s what many economists believe.” Richard Horton’s anti-economics strikes again.

Richard Horton, editor-in-chief of the venerable medical journal the Lancet, is no stranger to bad economics. In 2012 and 2013, he stoked the ire of economists worldwide with a series of ill-informed tweets. These included gems such as:

A number of measured responses were offered, but it’s unclear if they had any influence on Horton’s thinking.

Well, in this week’s edition of the Lancet, Horton once again wades erroneously into economics. Horton discusses William Baumol’s theory of the cost disease. Briefly, this theory offers an explanation of why healthcare continues to grow as a proportion of GDP. Growth in GDP occurs in part due to an increase in productivity, but growth in some sectors, such as manufacturing, increases more rapidly than in others, such as healthcare and education, which are typically labour intensive. Wages increase in the ‘productive sectors’ as a result of increased output. The wages in the ‘stagnant sectors’ also increase to stay in line with other sectors, but since productivity does not grow as fast either prices rise or profits fall, and it is usually the former. Therefore, healthcare continues to grow as a proportion of GDP as a consequence of economic growth. This is a positive, as opposed to normative, theory and we’ve previously discussed an empirical study examining it. So what does Horton have to say about the cost disease?

Health is bad for you. That’s what many economists believe. A man called William Baumol may be largely to blame. In the 1960s, he invented the notion of a “cost disease” in modern societies. It was a powerful metaphor, one that has shaped the prejudices of many a Minister of Finance ever since. His central idea sounds convincing. Some industries are good at increasing their productivity. As a result, they earn more money to invest in the wages of their employees. These sectors of the economy deserve our praise. There are other sectors where increasing productivity is harder. […] In areas that depend on human beings interacting with one another, as medicine does, productivity gains are hard to achieve. But the salaries of those working in these productivity-poor sectors rise anyway. […] The result of the Baumol effect is a disaster for society. The costs of a concert, ballet, or health service increase even though productivity stays stubbornly the same. What else could this be but a malignant “cost disease” on our collective welfare. [Link]

The trouble with this explanation of the cost disease is that, while it gets some of the basics of the argument (not metaphor) right, it has attached Horton’s normative beliefs (and anti-economics prejudices) to it. No economist has ever declared that “health is bad for you” or that this argument leads to the conclusion of a “disaster for society”. The main conclusion is that while there is economic growth, stagnant sector services like health care will take up a greater and greater proportion of national income, but national income will grow at least as fast in size. Baumol makes some other claims that Horton may wish to engage with as they have important consequences for access to health care:

  1. the cost disease will disproportionately affect the poor as healthcare services become more unaffordable,
  2. misinterpretation of the cost disease will lead to suboptimal policy (as we are seeing in the UK with significant underfunding),
  3. the private sector is liable to the same problems.

Matthew Bishop argues that economists should engage with those who know nothing of economics as a “worthy interlocutor in a way that values his opinion”. But as another blog argues, there is a difference between “the man who genuinely wants to learn more, and the one who is loudly spouting nonsense for political reasons.” One hopes that Horton is the former, but his previous output might suggest otherwise.


Chris Sampson’s journal round-up for 11th April 2016

Every Monday our authors provide a round-up of some of the most recently published peer reviewed articles from the field. We don’t cover everything, or even what’s most important – just a few papers that have interested the author. Visit our Resources page for links to more journals or follow the HealthEconBot. If you’d like to write one of our weekly journal round-ups, get in touch.

Estimating the medical care costs of obesity in the United States: systematic review, meta-analysis, and empirical analysis. Value in Health Published 6th April 2016

I’m always a little wary of the “[insert disease] costs the economy $[insert big number] per year” studies. There is just too much up for debate: whether a cost can be attributed to the disease; who bears the cost; whether in fact it should be considered a cost at all. A second look through the lense of a critical review is just what these studies need. Obesity is a big deal, but there is wide variation in estimates of its cost to the US economy. This study includes a systematic review and meta-analysis looking at the medical costs of obesity estimated by studies between 2008 and 2012. Twelve studies were included in the review. The annual cost of obesity per person that was reported in the studies ranged from $227 to $7269. Wow! The pooled estimate from the meta-analysis was $1910; around $150 billion for the US as a whole. The authors looked at the methods used in the studies, but due to the variation in methods chosen and data used they weren’t able to learn that much about how this might affect estimates. The studies aren’t entirely comparable to one another. So the authors also carry out an original analysis using data from the Medical Expenditure Panel Survey to explore the impact on estimates of alternative modelling strategies. The analysis was varied by 4 age groups, 5 statistical models and 4 sets of confounders to give 80 estimates in total. The alternative statistical models didn’t make much difference, but the authors found that their extended estimating equation had the best goodness of fit. This analysis found an average cost of $1343 per person. Age groups and confounders were important. Costs were especially high in the over 65s. Older obese people have a lot of obesity-related diseases, while obese children have very few and have relatively low costs. Controlling for obesity-related disease explained away most of the incremental cost. This brings us back to the question of what should and what shouldn’t be considered a cost of the disease. What we really want to know is the counterfactual cost of the presence of obesity; what if these people weren’t obese? It remains unclear how studies might even go about defining this, let alone actually estimating it.

Introduction of a national minimum wage reduced depressive symptoms in low-wage workers: a quasi-natural experiment in the UK. Health Economics [PubMedPublished 4th April 2016

The introduction to this paper states that “no study has investigated the health effects of the UK National Minimum Wage”. That took me by surprise. So – apparently – here is the first, and it’s particularly relevant given the recent introduction of the so-called ‘National Living Wage’. The authors use data from the BHPS to test whether the increase in wages for low earners associated with the introduction of the minimum wage resulted in a positive health effect. A difference-in-differences analysis was performed using data from just before and just after the introduction of the minimum wage. Health effect is measured using the General Health Questionnaire (GHQ), which asks about current mental health problems relative to what the respondent normally feels. The intervention group was those earning less than £3.60 per hour in 1998 and between £3.60 and £4.00 per hour in 1999. There are 2 alternative control groups; one consisting those earning just above the minimum wage in 1998 and another for people whose employer did not comply. Plenty of effort is made to try and isolate the effect by incorporating physical health changes into the model and exploring the role of financial strain as a mediating effect. The results show a (statistically significant) positive impact on the GHQ. But the results aren’t quite as compelling as they might at first seem. There are a lot of exclusions that might not stand up to scrutiny, and the intervention group was made up of just 63 people. It would be good to see the analysis adapted into an economic evaluation of the policy.

An econometric model of healthcare demand with nonlinear pricing. Health Economics [PubMedPublished 4th April 2016

In Germany, health insurance is mandatory and most people receive their coverage through a public system. Between 2004 and 2013 it operated an interesting policy: the first visit to a doctor in each calendar quarter was subject to a co-payment of €10, with no copayment for subsequent visits. That’s not a lot of money for most people, but instinct would tell me that at least some people would probably avoid a single visit within a quarter and perhaps bunch-up visits if possible. This study tests that instinct. The authors develop a model of health care demand based on health shocks arriving as a Poisson process. It assumes that the co-payment increases the probability of no visit taking place and that if one does take place then this is more likely to be later in the quarter. A joint analysis of two difference-in-differences experiments is used, based on both the introduction and the repeal of the policy. The control group consists the people with private health insurance who were not affected by the policy changes. Data come from the German Socio-Economic Panel and the main analysis included over 30,000 observations. This was in part thanks to the development and successful implementation of a method to address mismatching between observation date and calendar quarters. None of the various model specifications identified a statistically significant effect of the policy on the number of doctor visits, so I suspect it won’t be reintroduced any time soon.

Diagnosing the causes of rising health-care expenditure in Canada: does Baumol’s cost disease loom large? American Journal of Health Economics Published 31st March 2016

Baumol’s cost disease is a neat idea: health care costs will rise faster than most others because health care is labour intensive and – while wages will grow in line with other industries – productivity growth cannot keep up. There’s some evidence that Baumol’s cost disease does exist, but there is less evidence about how big a deal it is compared to other non-observable drivers of rising health care expenditure. As for many other countries, Canada’s health care spending has grown at a much faster rate than the consumer price index. This new study looks at national and provincial data from Canada for 1982-2011 and decomposes the growth rate into that driven by the cost disease, technological progress and observable factors. Observable variables include population ageing, per capita income growth, economic recession and social determinants of health. The analysis uses a recently developed method, referred to as the Hartwig-Colombier test, to evaluate the impact of Baumol’s cost disease. In line with previous research, growth in per capita income is shown to be the most important driver of health care spending growth. For all provinces, the analysis finds that the cost disease is relatively unimportant. Technological progress appears to have a far greater influence, accounting for at least 31% of spending increases. Furthermore, the authors find that population ageing is not such a big concern and that the spending increases resulting from it are manageable. The implication is that if Canada wants to control spending growth then it should focus on managing the adoption of new technologies.