Whether the benefits of medical spending exceed their costs is a key policy question, especially given the government's large and expanding role in the health care sector. This project aims to develop a new approach for measuring the marginal returns to medical spending, and to investigate its applicability to several different types of medical care. Medical care that results in a large share of expenditures, especially among the elderly, is of particular interest because of its importance for the design of public policies such as Medicare. The basis for the new approach to investigating marginal returns to medical care is a natural source of variation in treatment intensity: the wide variation in treatment intensity across physicians. In empirical contexts in which patients are quasi-randomly assigned to doctors - such as when the doctors to which patients are assigned are determined by which physician is on-call at the time of an emergent condition - we can better understand the nature of this variation across physicians, and employ it in an instrumental variables framework to examine the impact of intensive treatments on health care spending and health outcomes. The main objective of the proposed research is to identify specific types of medical care to which the proposed strategy can be applied. First, relevant empirical contexts must have a doctor or team of doctors that is clearly responsible for treatment decisions, and the (anonymized) identity of the doctors must be visible in claims data. Second, there must be variation in treatment intensity across doctors. Third, patient assignment to doctors must be as good as random. After identifying a set of candidate empirical contexts by identifying costly and prevalent contexts in the data and speaking with physicians, the key analytical step will be to use the Medicare claims data to narrow in on a set of empirical contexts where each of these criteria appear to hold in the data. This process will ideally result in several empirical contextsin which it will be possible to estimate the marginal returns to medical spending, ultimately leading to new estimates.
This project will broaden the toolkit available to measure the marginal returns to medical spending, laying the groundwork for the development of new evidence on the value of health spending. By identifying the treatments that produce the largest health gains, society can allocate resources to improve health more efficiently, ultimately resulting in more health per dollar of health expenditure.