Paper by Thomas E. Getzen Presented by Charles Courtemanche

1. Paper by Thomas E. Getzen Presented by Charles Courtemanche Health care is an individual necessity and a national luxury: applying multilevel decision models to the analysis of health care expenditures

2. Introduction • Is health care a necessity or a luxury? • Necessity: In studies with U.S. individual-level data, the income elasticity of health care is near zero. • Luxury: In studies with country-level data, the income elasticity is often above 1. • See Table 1 p. 266-267. • Debate in literature

3. Introduction • This paper argues that health insurance can reconcile these apparently conflicting results. • Health care being an individual necessity and national luxury is consistent with a simple multilevel model: • First level: Nation’s health care budget is determined • Second level: Budget is divided among residents • Intuition: With full insurance, an increase in an individual’s income does not directly affect her personal utilization of care but adds to the nation’s budget, increasing everyone’s utilization of care.

4. Variation within groups and variation between groups • Individual-level estimates measure within-group variation while country-level estimates measure between-group variation. • With risk pooling, these won’t be the same. • Consider a “pooled group” where each member pays the same premium p and has health expenditures x that are fully paid for out of the pool. • Let P and X be the group totals.

5. Variation within groups and variation between groups • Case 1: N=1 • An individual’s medical expenses are fully reflected by her premiums.

6. Variation within groups and variation between groups • Case 2: N=2 • An individual’s medical expenses are only half reflected by her premiums.

7. Variation within groups and variation between groups • Case: N=n where n is large • An individual’s medical expenditures are decreasingly reflected by her premiums as n grows, converging to 0.

8. Variation within groups and variation between groups • Effects of income y on expenditures • Individual: Define allocation across individuals as • Aggregate: • These are very different.

9. Multilevel model • Natural setting for multilevel model because “the decision of how much of the total budget to allocate to a specific individual based on small scale micro factors (s) may be almost entirely separate from the large scale (L) macro factors determining the total constraint.” • Level 1: • Level 2: • See Figure 1 p. 263.

10. Multilevel model • Figure 1

11. Conclusion • Seemingly paradoxical findings regarding the income elasticity of medical expenditures can be reconciled by the role pooled risk plays in the market for medical care. • Additional income doesn’t affect an insured individual’s budget constraint, but does affect the budget constraint of the health care system as a whole. • Multilevel modeling is useful in this context.