Controlling the US health care system with policy wedges

Abstract

Two state-space models, one for the US health care system and one for the US economy, were developed and estimated for the period 1950-1999. The output from the US economy model was then used as a reference input to control the growth of the health care system model. The counterfactual history produced by simulating the controlled model shows that a reduction in investment and volume-based services would have been needed to bring the growth of the health care system in line with the US economy. Specifically, a 13% reduction in capital expenditure, a 15% reduction in drug prices and a 32% reduction in prices for physician's services would have been needed over the late twentieth century. The methodology also suggests how universal health care programs might be designed using planning and economic incentives without either over-engineering plan provisions or using centralized, command-and-control approaches.