Financial Health Economics

78 Pages Posted: 20 Apr 2014 Last revised: 22 Jan 2015

See all articles by Ralph S. J. Koijen

Ralph S. J. Koijen

University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Tomas Philipson

University of Chicago; National Bureau of Economic Research (NBER)

Harald Uhlig

University of Chicago - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 21, 2015

Abstract

We provide a theoretical and empirical analysis of the link between financial and real health care markets. This link is important as financial returns drive investment in medical research and development (R&D), which in turn, affects real spending growth. We document a "medical innovation premium" of 4-6% annually for equity returns of firms in the health care sector. We interpret this premium as compensating investors for government-induced profit risk, and we provide supportive evidence for this hypothesis through company filings and abnormal return patterns surrounding threats of government intervention. We quantify the implications of the premium for the growth in real health care spending by calibrating our model to match historical trends, predicting a long run share of 34%. Policies that had removed government risk would have led to more than a doubling of medical R&D and would have increased the current share of health care spending by nearly 4% of GDP.

Keywords: Health economics, Health care spending, Medical innovation, Risk premium

Suggested Citation

Koijen, Ralph S. J. and Philipson, Tomas J. and Uhlig, Harald, Financial Health Economics (January 21, 2015). Available at SSRN: https://ssrn.com/abstract=2426751 or http://dx.doi.org/10.2139/ssrn.2426751

Ralph S. J. Koijen (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/ralph.koijen/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tomas J. Philipson

University of Chicago ( email )

Graduate School of Business
1101 East 58th Street
Chicago, 60637

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harald Uhlig

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
512
rank
51,130
Abstract Views
2,800
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information