The present state of health economics: a critique and an agenda for the future

Abstract

A couple of days ago, I was asked to give an interview concerning the conference ECHE 2012, the motto of which was, ‘‘Progress in Health Economics’’. One of the questions posed to me was, ‘‘What is your vision of Health Economics 10 years from now?’’ Here is what I had to say. There are two peculiarities of Health Economics that are of concern to me and that I would like to see addressed in the future. One is the often tenuous relationship of the discipline with general economic theory. Take for instance risk adjustment (RA) in health insurance, which has become an industry of its own in the course of the last 30 years [6]. Health economists invariably seek ways to neutralize the risk selection incentives of health insurers. However, RA payments by health insurers are not borne by them but are shifted to the insured under the guise of increased contributions. The analogy with an indirect tax is evident, and any standard Economics textbook will point out that, while an indirect tax is paid by the sellers of a good, it is effectively borne by the consumers (entirely so in the long run). In the case of RA, the low risks are made to pay a contribution in excess of what is justified in view of their risk profile, while high risks receive an indirect subsidy financed by the low risks. However, the analogy with indirect taxation has two implications. First, as long as RA remains imperfect (i.e., a situation unlike the long-run equilibrium in the case of a good traded on a competitive market), the risk-selection incentives of both the insured and the insurers must be targeted. After all, the low risks have an incentive to seek out a health insurer offering them a favorable deal, permitting them to eschew the indirect tax in form of payment into RA. The high risks do the same, selecting the health insurer offering them a low contribution thanks to a maximum cross-subsidy. This may explain why, at least in Switzerland, the volume of RA has not ceased to increase, contrary to expectations that RA would ‘wither away’ since it neutralizes insurers’ risk selection incentives [2], an expectation reminiscent of government ‘withering away’ in the happy Marxist state. Second, when there are two objectives (neutralizing the incentives for risk selection of the insurer and the insured in a RA context), the Tinbergen rule of economic policy states that two instruments are needed to attain both of them. Therefore, RA is subject to a kind of impossibility theorem precluding a perfect solution. Admittedly, it took me about a decade to recognize this [4]. Without doubt, Health Economics will benefit in the future by reinforcing its ties with general economic theory. The second peculiarity of Health Economics causing concern is its overly close relationship with national institutions and sponsors of research. This occurred to me for the first time during ECHE 1995 in Stockholm. When roaming between sessions, I noticed that there was hardly any overlap between two camps of delegates (this is also reflected in [7]). One camp comes from countries with a National Health Service (NHS). There, the discussion revolves about cost effectiveness, QALYs, and equity. The other camp is rooted in insurance-based countries; its focus is on risk selection and RA, moral hazard effects, and the production of health. Interestingly, the members of the two camps seem to be quite happy to be among themselves, presumably their reunion helping them to present their research to some national sponsor later.... This is an extended version of the Farewell Address by the Honorary Chairman, ECHE 2012 European Conference on Health Economics, 19–21 July 2012 in Zurich.