Volume 15, Issue 1

We estimate changes in sexual behavior for HIV-positive individuals enrolled in an AIDS treatment program using longitudinal household survey data collected in western Kenya. We find that sexual activity is lowest at the time that treatment is initiated and increases significantly in the subsequent six months, consistent with the health improvements that result from ART treatment. More importantly, we find large and significant increases of 10 to 30 percentage points in the reported use of condoms during last sexual intercourse. The increases in condom use appear to be driven primarily by a program effect, applying to all HIV clinic patients regardless of treatment status.

The 2010 Australian government tax review suggested Australia move to a uniform excise tax rate for all alcoholic beverages. Here, a model is presented and calibrated that shows the optimal per litre of pure alcohol (LAL) tax rates for beer, wine, spirits, and ready-to-drink spirits are substantially different to both current alcohol tax rates and the uniform tax rate recommended by the tax review. Specifically, given an individual consumer utility model, the best estimate values of the welfare maximising LAL tax rates are: $37 for beer, $11 for wine, $50 for spirits, and $77 for ready-to-drink spirits. The variation in the optimal tax rate across beverage types flows from differences in the externality costs associated with the consumption of each beverage type, and differences in the proportion of moderate consumption and abusive consumption associated with each beverage type. In addition, it is shown that the optimal tax rates are influenced by the range of costs that are considered to be externality costs, and the relative price responsiveness of abusers and moderate consumers.

Existing economic approaches to the design and evaluation of health insurance do not readily apply to coverage decisions in the multi-tiered drug formularies characterizing drug coverage in private health insurance and Medicare. This paper proposes a method for evaluating a change in the value of a formulary to covered members based on the economic theory of price indexes. A formulary is cast as a set of demand-side prices, and our measure approximates the compensation (positive or negative) that would need to be paid to consumers to accept the new set of prices. The measure also incorporates any effect of the formulary change on plan drug acquisition costs and “offset effects” on non-drug services covered by the plan. Data needed to calculate formulary value are known or can be forecast by a health plan. We illustrate the method with data from a move from a two- to a three-tier formulary.

Food away from home (FAFH) and, specifically fast food, has been targeted by academics and public policy officials alike as a major contributor to the obesity epidemic. Criticized as high in energy, fat and sugars, the implication is that consumers demand the combination of nutrients in FAFH in excess. If market-based policies intended to correct the perceived market failure in nutrient demand are to be successful, information on nutrient elasticities is required. Moreover, co-dependent relationships between nutrient intake and bioeconomic outcomes – obesity, physical activity and health status – are found to be important in the public health literature, but are not typically included in econometric studies of FAFH demand. Nutrients, however, do not have market prices. This study derives a set of implicit nutrient prices and estimates the elasticities of demand for nutrients in FAFH that takes into account the endogeneity of bioeconomic outcomes. Our estimation results show that fat is the only macro-nutrient that is elastic in demand, and all cross-price elasticities are small, so nutrient-based price policies may indeed be effective in modifying FAFH choices. Simulation results confirm this hypothesis, and also support the use of policies that subsidize positive health outcomes.

Standard techniques of cost effectiveness analysis measure a technology’s benefits in terms of expected life years (or quality-adjusted life years) gained at today’s life expectancies. However, this approach ignores the gains which derive from the possibility that a health technology allows an individual to survive long enough to benefit from other technological innovations which raise life expectancy (and quality of life) in the future. Borrowing a term from the finance literature, we refer to this source of value as the “option value” of innovation. We explain where this value comes from and how to calculate it in a variety of standard cost effectiveness analysis contexts. We provide a proof-of-concept using the example of the drug tamoxifen, which delayed the onset of breast cancer for some patients until more effective adjuvant treatment was available. We find that incorporating option value can increase the conventionally estimated value of tamoxifen with better adjuvant treatment by nearly a quarter (from $200,000 to $248,000 for those who initiated tamoxifen in 1999). We expect similar results for other drugs in therapeutic areas of rapid technological advancement.

Flexible spending accounts (FSAs) are a widely used arrangement that allow employees to pay for qualified out-of-pocket health expenses with pre-tax dollars. The tax preference given to FSAs has been controversial and recent health care law (Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act) limits the tax exclusion to an inflation-adjusted value of $2,500 (2013 $s). The limit is estimated to increase federal payroll and income tax receipts by $13 billion between 2013 and 2019. But the welfare implications of this change are unclear.This paper uses a unique panel dataset to explore the demographic profile of households likely to be affected by the tax increase. We use a sample of 19,322 households observed over the period 1998–2008. The data include FSA expenditures, insurance claim information for covered medical and dental expenditures, and household demographic information. We explore patterns of FSA usage by income and health status.We find that households likely to be affected by the tax increase disproportionately tend to be households experiencing one or more chronic health conditions. The existence of chronic illness is associated with relatively high and persistent medical expenses and also with relatively older and wealthier households. We estimate an average tax increase of $101 in 2013 for 13.9 million households with an FSA.

Despite bringing breakthrough medications to market, pharmaceutical companies incurred criticism during the 1990s and early 2000s because of high prices of many drugs. We argue that the benefits of pharmaceuticals should be evaluated in a dynamic context that extends beyond the patent expiration date. Now that numerous patents have expired, generic medications exist in many important drug classes. Thus, consumers reap the benefits of past innovation for years to come. We estimate that across 19 molecules whose patents expired from 2005-2009, $193-436 billion will transfer to consumers over 10 to 20 years due to patent expiration. This suggests that, while prices were high during the patent period, creating an incentive for innovation, the transfers to consumers after patent expiration are significant, which is how the patent system is designed to function.

Informal care provided to the elderly by their children is proposed as a less expensive alternative to institutional long-term care. This paper explores how the elderly's consumption of medical care changes in response to changes in the informal care they receive from their children. Many earlier studies have ignored both the endogeneity of informal care and the complicated nature of health care utilization data. This paper develops a two-part model with informal care treated as an endogenous regressor and imposes exclusion restrictions on the selection process. The model is fitted using the Bayesian Markov Chain Monte Carlo (MCMC) methods, in particular the Gibbs sampler and the Metropolis-Hasting algorithm. The average treatment effects and the distributions of the treatment effects are obtained via posterior simulation. The results indicate that informal care provides a substitute for nursing home care and hospital inpatient care, but it does not affect paid home health care on average. The treatment effects are heterogeneous. The largest substitution effects occur for nursing home and hospital inpatient care at the intensive margin. The policy analysis suggests that informal care policies targeting the group that incurs the largest substitution effect may help to reduce government spending on Medicaid and Medicare.

The empirical association between high hospital procedure volume and lower mortality rates has led to recommendations for the centralization of complex surgical procedures. Yet redirecting patients to a select number of high-volume hospitals creates potential negative consequences for market competition. We use patient-level data to estimate the association between hospital procedure volume and patient mortality and costs. We also estimate the association between hospital market concentration and mortality, cost, and prices. We use our estimates to simulate the change in social welfare resulting from redirecting patients at low-volume hospitals to high-volume facilities. We find that a higher procedure volume leads to significant reductions in mortality for patients undergoing surgery for pancreatic cancer, but not colon cancer. Procedure volume also influences costs for both surgeries, but in a nonlinear fashion. Increased market concentration is associated with higher costs and prices for colon cancer, but not pancreatic cancer patients. Simulations indicated that centralizing pancreatic cancer surgery is unambiguously welfare enhancing. In contrast, there is less evidence to suggest that centralizing colon cancer surgery would be welfare improving.

Recent evidence suggests that the economic value of increased health has been enormous, with most of these gains being driven by medical R&D. The R&D process for pharmaceuticals is particularly expensive and time consuming, with well-known studies from the Tufts Center for the Study of Drug Development suggesting that developing a single successful drug costs around $1 billion and takes roughly 12 years. We argue that these estimates are incomplete because they do not incorporate the social costs imposed by the regulatory process, namely the costs to producers in terms of forgone profits and the costs to consumers in terms of delayed access to drugs. In this article, we develop a framework to estimate the social costs imposed by the regulatory process. Under this framework, delays in drug development are socially costly because of reduced consumer surplus (due to delayed access to beneficial therapies), reduced producer variable profits, and increased R&D expenditures. We apply this framework to the case of therapies aimed at treating AIDS, non-Hodgkin’s lymphoma, and breast cancer. In each case, we find that the effects of drug delays on consumer surplus and variable producer profits are far larger than the effects on R&D costs. These findings suggest that patients, not firms, would be the primary beneficiaries from any improvements in streamlining the drug development process.