A new collection of scholarly work on the economics of the US healthcare sector is released today. The following is an adaptation of the ebook’s introduction by Filippo Lancieri.
This eBook was born out of a general diagnosis that the US healthcare sector is not only one of the most studied industries in economics, but also one of the areas where the field can make the most progress. Indeed, the American healthcare industry has many features that are particularly attractive to economists: It is one of the largest sectors (if not the largest) of the US economy, accounting for almost 20% of national GDP and employing tens of millions of workers. Firms range from large conglomerates to small providers, and there is strong government-private sector interaction, with the Federal, State, and local governments shaping policy. The industry also has many failures, is undergoing tremendous change, and produces a wealth of data (even if not always perfectly formatted).
The field of economic healthcare research, however, is far from saturated. Healthcare is such a complex and intricate sector, one where details matter so much, that it is almost its own subfield of economics. These high barriers to entry prevent scholars from researching healthcare topics and weakens the cross-pollination of ideas, an increasing hallmark of many other areas. This is problematic, not the least because any major advances in healthcare economics literally saves lives (and billions of dollars).
This project aimed to help lower these barriers and kickstart broader collaborations. Fiona Scott-Morton, Craig Garthwaite, Luigi Zingales and I started putting together the terrific cohort of authors that are part of this eBook in early 2020. We had two motivating goals. The first was to cover a wide range of healthcare topics—from the most studied (such as pharma) to the most neglected (such as rural healthcare). The second was to engage scholars not traditionally involved in healthcare research. To our delight, most people we contacted agreed with our diagnostics and immediately accepted the challenge. This motivated us to organize a day-long online workshop in the fall of 2020, where a large group brainstormed the areas and topics most in need of novel research and collaboration.
The seven topics of this eBook materialized in that call. The authors then selected the topics they would like to cover, and we encouraged them to contact other economists not engaged in healthcare research but who they believed would be a good addition to the field. As the network grew, this volume’s final list of authors came to life.
Each cohort had a simple but important task, divided into three questions. First, they had to articulate what was the importance of studying that particular field of healthcare. Second, they had to summarize the research frontier on that topic. Finally, they had to outline what are the most important gaps that should be covered by future research.
To provide an informal peer-review, the Stigler Center—now in collaboration with Matt Notowidigdo and the Chicago Booth Healthcare Initiative—organized in October 2021 an “Economics of Healthcare” Conference. The conference mirrored the eBook in goal and organization. Each group of authors presented a draft of their contribution, receiving detailed feedback from two previously assigned discussants including someone from the healthcare field and someone from the outside. The conference also hosted two fascinating keynotes. The first, by Katherine Baicker, discussed the challenges of translating research into policy in this and other areas. The second, by Marcella Alsan, highlighted the many challenges in addressing deeply rooted racial inequalities in healthcare. Marcella’s invaluable address is online and a must-watch for anyone doing research in this field (and in other fields).
The authors then incorporated the feedback into their drafts. Their final versions are the chapters of this eBook.
The first chapter, by Nitzan Arad, Robin Feldman and Fiona Scott Morton, covers “Barriers to Entry in Pharmaceutical Markets.” The Chapter focuses on how the US tries to balance static versus dynamic tradeoffs through different incentive systems for pharmaceutical innovation. It explains how a combination of legal and practical entry barriers developed by incumbent companies and regulators limits market forces’ role in controlling the prices of new and old drugs. It also covers potential proposals to promote competition and discusses many important and outstanding research questions in this area.
The second chapter, by Zarek Brot-Goldberg, Catherine Che and Ben Handel, focuses on “Pharmacy Benefit Managers and the Vertical Relationships in Drug Supply.” PBMs are one of the entities everybody loves to hate in healthcare. The chapter explains what role PBMs play in the industry, and develops a vertical model that shines a light on how to think about the impact of PBMs in the broader drug supply ecosystem. It concludes by addressing the importance of new data sources to help answer relevant questions in this area.
The third chapter, by David Dranove and Craig Garthwaite, looks at “The State of Research on Medical Innovations.” It starts by discussing common challenges in empirical studies on medical innovation, ranging from what an innovation is to how to measure welfare gains from innovation, and then provides an overview of empirical studies in this area. Finally, it discusses how procedural innovation has been a particularly neglected research area, and what are important open questions in this field.
The fourth chapter, by Jonathan Kolstad and Robert Town, addresses the connection between “Behavioral Health Economics and Competition Policy.” The chapter shows how a significant body of empirical studies challenges the traditional neoclassical assumptions of rational consumer or firm behavior in healthcare settings. This leads to many erroneous policy prescriptions—still, behavioral economics is not widely adopted in healthcare research. The chapter concludes by developing a bargaining model for a merger between a hospital and a medical technology provider to exemplify the errors created by incorrect assumptions about how consumers and firms make decisions.
The fifth chapter, by David Chan, Brigham Frandsen, Michael Powell and James Rebitzer, explores the interconnection between “Organizational Economics and the US Healthcare System.” It starts by assessing the extent to which organizational economics can contribute to the understanding of the US healthcare system, and then discusses how organizational economics can provide important insights into many of the outstanding questions in the field. The general conclusion is that this is another very promising area for collaborative research.
The sixth chapter, by Caitlin Carroll and Paul Eliason, explores one of US healthcare’s most important and neglected areas: the “Industrial Organization of Rural Healthcare Markets.” It starts by outlining the major challenges of providing adequate care in rural areas, where a large percentage of the US population lives. Indeed, the unique characteristics of many rural settings upend many traditional assumptions about running efficient healthcare systems. Yet, ideal solutions for rural healthcare remain broadly understudied. This is an area that urgently needs more engagement.
The last chapter by Cory Capps, Tetyana Shvydko and Zenon Zabinski concludes the eBook by analyzing “Healthcare Antitrust Enforcement and Regulation by the States.” A particularity of the US antitrust system is the involvement of State governments in enforcement actions. Of these, healthcare is likely the sector that sees the most activity by state regulators. The authors provide a detailed overview of state interventions through enforcement actions and through hospital cooperation laws that exempt providers from antitrust scrutiny (so-called COPA agreements). It concludes by discussing the potential impacts of these two opposite policies, and what types of future research can help better disentangle interventions that are welfare-enhancing from those that are welfare-decreasing.
A final area that did not make it into the eBook is the political economy of US healthcare. This is one of the most critical fields, as many distortions that scholars and commentators almost unanimously criticize are the product of bad legislation and regulation. Yet, it is also one of the most understudied: there is no political economy chapter because there is not much to cover. This is a green and very promising field, and one we certainly encourage young scholars to focus on.
All in all, we hope this eBook will be used by established and new scholars to better understand some of the subtleties of the complex web that makes the US healthcare system. As most economists would agree, lowering barriers to entry should normally lead to increased output and better quality—studying the economics of US healthcare sector should be no exception.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
