Code Red: Two Economists Examine the U.S. Healthcare System

July 11, 2012

Exploding Myths

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 2:40 pm

literature on health spending, written by Harvard’s Mike Chernew and Joe Newhouse. The review (which appears as Chapter One in the Handbook of Health Economics, Volume 2) explores the causes of health spending growth. In a single paragraph, Chernew and Newhouse explode two myths about health spending:

1) The We need more prevention myth. Chernew and Newhouse write: “Existing evidence suggests that the savings associated with reduced use of health care downstream are generally not sufficient to offset the cost of most preventive services, so that preventive services as a whole tend to increase overall spending in the course of a lifetime.”

2) The Financial barriers only lead to more spending myth. Chernew and Newhouse write: “An increase in co-payments (by Medicare beneficiaries) for office visits and prescription drugs reduced the use of those services but was associated with an increase in hospitalization. The increased expenditure on hospitalizations, however, offset only around 20 percent of the savings gained from the reduced use of office visits and drugs.”

Chernew and Newhouse add two caveats: (1) Targeting specific high risk individuals can produce savings, and (2) the health benefits from prevention and increased office visits and drug use could justify the higher cost. Caveats aside, this review of the literature dispels the view that reducing healthcare costs is simply a matter of increasing prevention and reducing financial barriers to care. I should add that this view, so badly punctured by Chernew and Newhouse, is often expressed by those who would blame all of our ills on the insurance industry. Whatever one wants to say about insurers, good or bad, we shouldn’t pin this on them.


  1. Interesting post; Although I think you (and the authors) need to be more specific about what “preventive services” actually constitute. For example, if one defines the services merely as extra check-ups at a doctor office or taking statins without any other component- yes, that may well be the case. However, “preventive services” also encompass employee exercise and lifestyle programs that focus on encouraging healthier lifestyle choices- if this is what is meant, there is certainly more evidence of their effectiveness.

    Thus, you should possibly amend your last comment to reflect that increasing prevention in a clinical context is far different from prevention in other contexts- a worthy distinction to make.

    Comment by Erik T — July 11, 2012 @ 3:04 pm

    • Excellent points. The review discusses “averages.” There is important variation among services and to the extent that this variation is easy to characterize, that would lend itself to reasonable policies.

      Comment by dranove — July 11, 2012 @ 3:06 pm

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