Harvard Medical School

Joseph P. Newhouse: Health Economics

Editor’s Note: Dr. Joseph P. Newhouse is the John D. MacArthur Professor of Health Policy and Management at Harvard University, Director of the Division of Health Policy Research and Education, Chair of the Committee on Higher Degrees in Health Policy, and Director of the Interfaculty Initiative in Health Policy.  He is a member of the faculties of the John F. Kennedy School of Government, the Harvard Medical School, the Harvard School of Public Health, and the Faculty of Arts and Sciences, as well as a Faculty Research Associate of the National Bureau of Economic Research.

You can read his full bio from here, here and here.

eTalk’s Niaz Uddin has interviewed Joseph P. Newhouse recently to gain insights about his ideas, research and works in the field of health economics which is given below.

Niaz: Dear Joseph, thank you so much for joining us. We are very honored and delighted to have you at eTalks.

Joseph: It’s my pleasure to join with you.

Niaz: You received B.A. and Ph.D. degrees in Economics from Harvard University. Following your Bachelors degree, you were a Fulbright Scholar in Germany.  You are John D. MacArthur Professor of Health Policy and Management at Harvard University, Director of the Division of Health Policy Research and Education, Chair of the Committee on Higher Degrees in Health Policy and Director of the Inter-faculty Initiative in Health Policy.  At the beginning of our interview can you please tell us about your educational journey and the transformation of your career from Economics to Healthcare?

Joseph: I have always thought of myself as an economist who worked in the applied area of health and medical care.  After I finished graduate school I joined the RAND Economics Department, intending to spend about half my time working on projects related to health and the other half of my time in other applied areas of economics.  In the domain of health I was interested in the demand for medical care and early on designed what became known as the RAND Health Insurance Experiment.  That projected required my full time – really more than full time – attention for 15 years, by which time I had given up any notion that I would work on topics not related to health and medical care.

Niaz: You are one of the nation’s top health economists. What do you think about health economics?

Joseph: I think health economics has two main streams of work.  One relates to medical care, with the seminal paper being Kenneth Arrow’s 1963 American Economic Review paper, Uncertainty and the Welfare Economics of Medical Care.”  This stream focuses on issues that arise because the market for medical goods and services differs in so many ways from the model of a perfectly competitive market in introductory economics textbooks.  The second relates to health as opposed to medical care, with the seminal work being Michael Grossman’s 1972 Journal of Political Economy paper, On the Concept of Health Capital and the Demand for Health” and his earlier National Bureau of Economic Research Monograph, “The Demand for Health.”  This line of work focuses on the actions of individuals that affect their health, and sometimes the health of others as well, including not only seeking medical care but also investing in education and engaging in various behaviors that are either beneficial or detrimental to health.

Niaz: What are the nucleus aspects of health economics that every policy maker should keep in mind?

Joseph: In answering this I take the perspective of a middle or high income country; the issues in low income countries differ somewhat.  The issue at the front of mind of most policy makers I interact with, as well as most citizens, is the cost of medical care.  In almost every country spending on medical care has risen faster than income, meaning it takes an ever larger share of tax revenue and often of households’ after tax income as well.  There are, of course, a huge number of suggestions and approaches coming from health economics to address the cost of care, but in the interest of being succinct, I will just mention two, both of which relate to the distinction between a high level of cost and a high growth rate of cost.

Every health care system has its share of inefficiencies; not surprisingly, most solutions proposed for dealing with health costs are directed at these inefficiencies.  One example is reducing paper work.  Although it is laudable to reduce inefficiency, success means one will have achieved a once-and-for-all reduction in cost, which will not necessarily reduce the steady state growth rate of cost.  In other words, once the inefficiency is eliminated, those savings have been achieved and costs will start to rise again unless a new action is taken.  Yet in the long run it is the steady state rate of growth that is the larger problem.  In other words, by all means minimize inefficiencies, but ultimately policy makers need a strategy for dealing with the growth rate.  Peter Orszag, when he was the director of the US Congressional Budget Office, called such a strategy this bending the curve.

The second observation relates to policies that address cost.  The growth in health care cost stems partly from the growth in income and partly from new and improved methods for treating patients of all sorts such as new drugs, new medical procedures, new medical devices, new imaging, and new diagnostic tests.  Growth in income and growth in knowledge interact; the developers of the new therapies expected to find a market for them, or they would not have proceeded to develop them.  Efforts to reduce the growth rate of cost will almost certainly slow development, but need to be done in a way that considers the benefits that may be foregone by adopting the new policy.  There are many diseases for which current therapy is not very effective, for example, many cancers as well as Alzheimers and other neurodegenerative diseases.  It would be worth giving up quite a lot to have effective cures for these diseases.  I hear too many discussions where it sounds as if the only objective is to reduce cost or the growth rate of cost rather than reduce or eliminate those activities that do not provide sufficient benefit.

Niaz: As you know, millions of people are now living under poverty line. They can’t afford to have food every day. Health care is mostly a day dream for them. After living hand to mouth they depart. And it has been happening decades after decades. What are your suggestions to save those people to live a healthy life and to contribute for this mother earth?

Joseph: My expertise pertains to higher income countries, but economic growth has pulled tens of millions out of poverty in China and India, and many low income countries have started to grow at good rates.  Such growth not only means higher household incomes but also enables public investment in infrastructure that can improve health.  That plus good governance are undoubtedly important in helping these people.

Niaz: Why private Medicare plans don’t cost less?

Joseph: Private Medicare plans are called Medicare Advantage plans.  They generally provide those who join them rather than joining traditional Medicare lower premiums, lower cost sharing, and/or additional covered services, but this is in part because of higher reimbursement.  My own view is that the larger benefit of well run plans, however, is better medical management of many chronic diseases such as diabetes. (I should note that I am a director of, and own equity in, Aetna, which sells Medicare Advantage plans.)

Niaz: We are living in the age of superb technological innovation. Most developed countries are taking optimum advantage of technological innovation for better health care. What are your ideas for under developed, developing and poor countries to take the advantage of technological innovation to build a better health care?

Joseph: Again, my expertise is around higher income countries, but I think an innovation with large promise for low income countries is mobile telephony because medical advice can be given over the phone to lower level personnel when transportation to physicians with more training is not feasible.

Niaz: Different countries have different health care policies. According to you, what should be the most priority for a country in setting health care policy?

Joseph: Each country has its own values, traditions, and health care institutions which quite properly shape its policy. For that reason I doubt that there is a general answer to this question.  But aspects of life styles in many countries are inimical to health.  For example, obesity rates have increased rapidly in many countries, so much so that some demographers predict life expectancy will fall.  Any use of tobacco is damaging to health, and its use varies substantially among countries.  Trying to promote a healthy life style plus insurance coverage to protect households from being devastated financially by illness are priorities that seem applicable to a wide range of countries.

Niaz: What will be the potential challenges/roadblocks in the way of implementing those top priorities? How can countries achieve those priorities?

Joseph: Lifestyles are difficult to change, but we know that taxes can change use of goods such as tobacco.  Changing social norms also help; restricting the use of tobacco in public places, for example, has contributed to an overall fall in use.    Achieving universal coverage is largely a political issue, although there are certainly technical issues.

Niaz: Can you please briefly tell us about your book ‘Free for All: Lessons from the RAND Health Insurance Experiment’? 

Joseph: The booksummarized the results of perhaps the largest health services research project ever done.  The Experiment was a randomized trial that varied the level of initial cost sharing for medical services; some families received all care at no cost to them, others had (approximately) a large deductible, and still others were intermediate.  The cost sharing was scaled down for lower income households.

The use of services clearly responded to what patients had to pay out of pocket; use was roughly 30 percent higher if patients didn’t have to pay that if they faced a large deductible.   For the average person we found minimal deleterious effects of cost sharing on health outcomes, but low income hypertensives had their blood pressure better controlled if care was free.  In addition, some families were randomized to a Health Maintenance Organization, where care was free if it was sought at the Organization.  Those families made markedly less use of the hospital than families in the fee-for-service system and we detected no adverse effects on their health.

Niaz: Our readers will also love to know about ‘Pricing the Priceless: A Health Care Conundrum’. Can you also please tell us about it?

Joseph: This book is an elaboration of the Walras-Pareto Lectures given in Lausanne in 1997.  I tried to summarize the many years I had spent on Commissions that advised the American Congress on setting reimbursement in Medicare.  I went through several examples of how easy it is to misprice in administered price systems and then went on to consider mixed systems of reimbursement, part fee-for-service and part capitation.

Niaz: You have been doing all exciting works in your whole career. You have achieved a wide variety of prestigious awards. You have been leading great organizations. What does excite you always to do the next big thing?

Joseph: To learn what is not known, to teach the next generation, and to learn from my colleagues.

Niaz: I have learned that you love to spend your spare time with your grandchildren and playing golf? Do you actually get spare time? 

Joseph: Most definitely.

Niaz: Can you please share us about the secrets of your sustainable remarkable career? 

Joseph: Thank you for the compliment.  I have tried to work on problems that I felt were important, and I have been blessed to have many wonderful colleagues who have helped me enormously.

Niaz: What is your advice to people who want to follow your footsteps?

Joseph: Choose important problems to work on that motivate you and are tractable, and surround yourself with persons whose skills complement yours.

Niaz: Any last comment?

Joseph: Thank you for giving me this opportunity.

Niaz: Finally, we are grateful to you to have your precious time. Thanks again to share us your invaluable ideas, knowledge and experience. We wish you luck for your good health and impressive works.

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1. Peter Klein on Entrepreneurship, Economics and Education

2. Derek Sivers on  Entrepreneurship, CD Baby and Wood Egg

3. F. M. Scherer on Industrial Economy, Digital Economy and Innovation

4. Diego Comin on Entrepreneurship, Technology and Global Economic Development

5. Stephen Walt on Global Development

6. Juliana Rotich on Social Entrepreneurial Innovation

7. Joseph Nye on Global Politics