Based on a examine by Frankovic and Kuhn (2022), the reply is each. However, the worth of elevated innovation–as measured by way of longevity features–greater than offset inefficiencies from overspending. Specifically, the authors use an overlapping generations mannequin the place people should purchase medical health insurance and medical progress is dependent upon well being care sector return on funding. The authors calibrate their mannequin utilizing longevity knowledge from the Human Mortality Database from 19650 by way of 2005, earnings knowledge from the Current Population Survey (CPS) and well being care spending knowledge from the National Center for Health Statistics (NCHS). This timeframe is related as 1965 was the 12 months Medicare was applied within the US.
Using this system, the authors discover that:
…extra in depth medical health insurance accounts for a big share of the rise in US well being spending but additionally boosts the speed of medical progress. A welfare evaluation exhibits that whereas the subsidization of well being care by way of medical health insurance creates extreme well being care spending, the features in life expectancy led to by induced medical progress greater than compensate for this.
Overall, elevated ranges of medical health insurance lower consumption as extra money is spent on well being care. At the identical time, capital–notably capital invested in R&D–will increase as medical health insurance will increase returns on funding as extra sick sufferers are in a position to afford therapy. The authors word that:
One rationalization for why the advantages from medical progress more and more outweigh the loss from ethical hazard lies with the continued progress of earnings: As lengthy as per capita consumption is growing over time, people are inclined to assign an growing worth to life (Hall and Jones, 2007, Chen et al., 2021). This argument extends to the evaluation of ethical hazard, the place people are prepared to tolerate an growing distortion from well being insurance coverage in change for a rise in lifetime, so long as this solely slows down however doesn’t reverse consumption progress.
The authors additionally word that medical costs improve over time because of the Baumol price illness; particularly the joint affect of productiveness progress within the last items sectors and medical progress itself result in greater costs.
You can learn the total paper right here.