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CURRENT ISSUES IN HEALTH ECONOMICS
 CONTRIBUTIONS
TO
ECONOMIC ANALYSIS

290

Editors:
B.H. BALTAGI
E. SADKA

United Kingdom – North America – Japan

India – Malaysia – China
 CURRENT ISSUES IN HEALTH
ECONOMICS

DANIEL SLOTTJE
Department of Economics, Southern Methodist University,
Dallas, TX, USA

RUSTY TCHERNIS
Department of Economics, Georgia State University,
Atlanta, GA, USA

United Kingdom – North America – Japan

India – Malaysia – China
Emerald Group Publishing Limited
Howard House, Wagon Lane, Bingley BD16 1WA, UK

First edition 2010

Copyright r 2010 Emerald Group Publishing Limited

Reprints and permission service

Contact: [email protected]

No part of this book may be reproduced, stored in a retrieval system, transmitted in any
form or by any means electronic, mechanical, photocopying, recording or otherwise
without either the prior written permission of the publisher or a licence permitting
restricted copying issued in the UK by The Copyright Licensing Agency and in the USA
by The Copyright Clearance Center. No responsibility is accepted for the accuracy of
information contained in the text, illustrations or advertisements. The opinions expressed
in these chapters are not necessarily those of the Editor or the publisher.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

ISBN: 978-0-85724-155-9
ISSN: 0573-8555 (Series)

Emerald Group Publishing

Limited, Howard House,
Environmental Management
System has been certified by
ISOQAR to ISO 14001:2004
standards

Awarded in recognition of
Emerald’s production
department’s adherence to
quality systems and processes
when preparing scholarly
journals for print
 Contents
List of Contributors xi

Introduction xiii

CHAPTER 1 SCHOOL POLICIES AND CHILDREN’S

OBESITY 1
Patricia M. Anderson, Kristin F. Butcher and
Diane Whitmore Schanzenbach
1. Introduction 1
2. The food environment 2
3. The activity environment 5
4. Other school policies with possible effects on student weight 6
5. Being in school versus not being in school 8
6. Policy simulations 9
7. Conclusions 13
References 13

CHAPTER 2 ALCOHOL POLICIES AND CHILD

MALTREATMENT 17
Sara Markowitz, Michael Grossman and
Ryan Conrad
1. Introduction 17
2. Analytical framework 20
3. Data 21
3.1. Alcohol regulations 23
4. Empirical estimation 25
5. Results 29
6. Conclusions 30
Acknowledgments 31
References 31
Appendix A. State liquor sales status 35
vi Contents

CHAPTER 3 CHILD CARE CHOICES AND CHILDHOOD

OBESITY 37
Resul Cesur, Chris M. Herbst and Erdal Tekin
1. Introduction 38
2. Empirical specification 42
3. Data 44
4. Results 47
5. Conclusion 58
References 58
Appendix 61

CHAPTER 4 INDIVIDUAL TIME PREFERENCES AND

HEALTH BEHAVIORS, WITH AN
APPLICATION TO HEALTH INSURANCE 63
W. David Bradford and James F. Burgess, Jr.
1. Introduction 64
2. Background 65
2.1. Foundations of time preferences 65
2.2. Measuring time preferences 68
2.3. Dynamic questions in time preferences 70
2.4. Time preferences and health 70
3. Discounting and health insurance choice 73
3.1. Conceptual model of health insurance demand 73
3.2. Discounting and health insurance choice 75
3.3. Discounting and health insurance choice results 82
4. Summary 90
Acknowledgment 91
References 91

CHAPTER 5 DISPARATE EFFECTS OF CHIP

PREMIUMS ON DISENROLLMENT
FOR MINORITIES 95
James Marton, Cynthia S. Searcy and
Jennifer Ghandhi
1. Introduction 96
2. Background 97
3. KCHIP program and data 99
4. Methods 102
5. Results 103
5.1. Main effects of the policy indicators 103
5.2. Main effects of the demographic indicators 105
5.3. Differential impact of the new premium on
minorities 106
 Contents vii

6. Discussion 109
Acknowledgment 111
References 111

CHAPTER 6 HEALTH OUTCOMES FROM HEAD START

PARTICIPATION 115
Carolina C. Felix and David E. Frisvold
1. Introduction 116
2. Conceptual framework 116
3. Small, high-quality preschool programs 117
4. The Head Start program 119
5. An analysis of the influence of Head Start participation on
risky behaviors in adolescence 123
5.1. Data 123
5.2. What are the determinants of Head Start participation? 125
5.3. Selection on observables 129
5.4. Selection on unobservables 131
6. Conclusion 133
Acknowledgment 134
References 134

CHAPTER 7 UNIVERSAL HELMET LAWS AND

MOTORCYCLE FATALITIES: A
LONGITUDINAL ANALYSIS OF
POLICY CHANGES 139
Michael T. French, Gulcin Gumus and
Jenny F. Homer
1. Introduction 140
2. Background 144
3. Data and methods 146
4. Results 149
5. Conclusions 157
Acknowledgments 159
References 159
Appendix A. Variable definitions and sources 162

CHAPTER 8 ACCOUNTING FOR RACIAL/ETHNIC

DISPARITIES IN CHILDREN’S OBESITY
STATUS AT 2 YEARS OF AGE 163
Jason M. Fletcher
1. Introduction 164
2. Literature review 164
3. Data and empirical methods 167
viii Contents

4. Results 168
5. Discussion 171
Acknowledgments 174
References 174
Appendix A 177

CHAPTER 9 EFFECTS OF EDUCATION ON ADULT

HEALTH IN SWEDEN: RESULTS
FROM A NATURAL EXPERIMENT 179
Jasmina Spasojević
1. Introduction 180
2. Conceptual framework 181
3. Model 183
4. The Swedish natural experiment: compulsory
schooling reform 184
5. Data 185
6. Empirical results 186
6.1. Effect of the compulsory schooling reform on
education 187
6.2. Treatment of education in the health structural
equation 189
6.3. Treatment of income 194
7. Conclusion 196
Acknowledgments 196
References 196

CHAPTER 10 A SURVEY ON THE ECONOMICS

OF THE U.S. PHARMACEUTICAL
INDUSTRY 201
Ian McCarthy
1. Introduction 202
2. Product life cycle 203
2.1. Research and development 203
2.2. Marketing 206
2.3. Supply chain 211
2.4. Prescription drug sales and profitability 212
3. Prescription drug prices 213
3.1. Defining price 213
3.2. Trends in prescription drug prices 215
3.3. Determinants of price 217
4. Consumer behavior in the pharmaceutical industry 221
4.1. Prescription drug utilization 222
4.2. Demand elasticity 223
4.3. Physicians 224
 Contents ix

4.4. Consumer information 225

4.5. Insurance coverage 226
5. Conclusion 235
References 236

CHAPTER 11 THE INDIRECT IMPACTS OF SMOKING

BANS IN GAMING VENUES 243
Joseph G. Hirschberg and Jeanette N. Lye
1. Introduction 243
2. Electronic gaming machines 245
3. The relationship between gambling and smoking 246
4. Smoking bans – a review of previous literature 248
5. Smoking ban in Victoria, Australia 249
5.1. The local impacts of the smoking ban 249
5.2. The tax revenue impacts of the smoking ban 253
6. Conclusions 255
References 256
 List of Contributors
Patricia M. Anderson Department of Economics, Dartmouth College,
Hanover, NH, USA
W. David Bradford Department of Public Administration and Policy,
University of Georgia, Athens, GA, USA
James F. Burgess, Jr. Department of Health Policy & Management,
Boston University School of Public Health,
Boston, MA, USA
Kristin F. Butcher Department of Economics, Wellesley College,
Wellesley, MA, USA
Resul Cesur Department of Economics, Andrew Young School
of Policy Studies, Georgia State University,
Atlanta, GA, USA
Ryan Conrad School of Public Health, University of California,
Los Angeles, CA, USA
Carolina C. Felix Department of Economics, Emory University,
Atlanta, GA, USA
Jason M. Fletcher Division of Health Policy, School of Public
Health, Yale University, New Haven, CT, USA
Michael T. French Department of Sociology, University of Miami,
Coral Gables, FL, USA
David E. Frisvold Department of Economics, Emory University,
Atlanta, GA, USA
Jennifer Ghandhi Harris School of Public Policy Studies, University
of Chicago, Chicago, IL, USA
Michael Grossman Ph.D. Program in Economics, City University of
New York Graduate Center and National
Bureau of Economic Research, New York,
NY, USA
Gulcin Gumus College of Business, Florida Atlantic University
and IZA, Boca Raton, FL, USA
Chris M. Herbst School of Public Affairs, Arizona State University,
Phoenix, AZ, USA
Joseph G. Hirschberg University of Melbourne, Melbourne, Victoria,
Australia
Jenny F. Homer Department of Sociology, University of Miami,
FL, USA
xii List of Contributors

Jeanette N. Lye University of Melbourne, Melbourne, Victoria,

Australia
Sara Markowitz Department of Economics, Emory University
and National Bureau of Economic Research,
Atlanta, GA, USA
James Marton Department of Economics, Andrew Young School
of Policy Studies, Georgia State University,
Atlanta, GA, USA
Ian McCarthy FTI Consulting and University of North Texas,
Dallas, TX, USA
Diane Whitmore The School of Education & Social Policy,
Schanzenbach Northwestern University, Evanston, IL, USA
Cynthia S. Searcy Department of Public Management and Policy,
Andrew Young School of Policy Studies,
Georgia State University, Atlanta, GA, USA
Jasmina Spasojevic´ Department of Economics, Trinity College,
Hartford, CT, USA
Erdal Tekin Department of Economics, Andrew Young School
of Policy Studies, Georgia State University,
Atlanta, GA, USA
 Introduction

In March 2010, President Obama signed into law the most broad and
sweeping reform of health care in U.S. history. This was done at a time when
aggregate medical expenses are significantly higher than they have ever been:

Decade (number of Average annual

observations) spending (billions)

2000s (9) 1,854.3

1990s (10) 969.4
1980s (10) 413.1
1970s(10) 128.9
1960s (10) 41.5
1950s (10) 18.0
1940s (3) 8.7
1930s (1) 2.9
1920s (1) 3.6
xiv Introduction

The average aggregate medical expenditure from 2000 to 2008 was 1.85
trillion dollars per year. In addition, the medical portion of the consumer
price index (CPI) shows a higher price level of medical care than ever
before. It is unlikely that quality of care has risen at the same rate (the
medical CPI is almost eight times as high as it was in 1976), so it is very
possible that consumers are paying more for each effective unit of medical
care.

The purpose of this book is to analyze the effect of policy on national

health status and to expand the knowledge base regarding the economics of
health care. Many of the issues pertaining to health care are fundamentally
economic issues, from universal coverage and waste issues to aggregate
supply of health care professionals and the pricing of pharmaceuticals.
This book will provide, in one place, theoretical and empirical research on
a wide variety of issues in medical economics.
In Chapter 1, Dr. Patricia M. Anderson of Dartmouth College,
Dr. Kristin Butcher of Wellesley College, and Dr. Diane Schanzenbach
of the University of Chicago collaborate to state that, given the large
amount of time that children spend in school, public health policy makers
tend to focus on schools as an important battleground in the fight against
childhood obesity. The question of interest is whether the school
environment is currently a contributing factor to the increase in childhood
obesity, and whether changes in school policies could help curb the increase.
It is important to realize that fundamentally, obesity is the result of an
energy imbalance – more calories are consumed than are burned. It is
possible for the school environment to have an effect on either side of this
equation. Of interest, then, is whether being in school is beneficial or
detrimental to children’s weight outcomes overall, as well as identifying
what policies may be affecting the energy balance equation. Discussion
suggests that some school environments are worse than others – that is, that
 Introduction xv

schools with lower quality lunches, more junk food, and more account-
ability pressure are likely to produce fatter children. It may still be the case,
though, that being in school is better than being out of school – it will
depend on what the alternative is.
In this chapter, Drs. Anderson, Butcher, and Schanzenbach review their
(and other’s) research on the role of school policy (and school in general)
on childhood obesity. Their aim is to synthesize this literature and provide
interpretation and context for readers new to the area of school policy and
childhood obesity. Using the simple idea of energy balance, they simulate
the impact of various policies, by making straightforward assumptions
about the changes in activity levels or caloric intake implied by each policy.
They implement a model of basal metabolic rate, and metabolic equivalent
intensities of activity, and then use the fact that an excess of 7,500 calories
adds a kilogram of weight, to simulate the potential effect of a range of
policies. Seemingly, small changes in policy may well result in noticeable
changes in the weight distribution of children.
In Chapter 2, Dr. Michael Grossman of the City University of New York
and NBER, Dr. Sara Markowitz of Emory University and NBER, and
Dr. Ryan Conrad of the City University of New York address alcohol
policies and their effect on child mistreatment. The purpose of this chapter
is to empirically estimate the propensity for alcohol-related policies to
influence rates of child abuse and neglect. The alcohol regulations of interest
include beer, wine, and liquor taxes, drunk driving laws, and areas ‘‘dry’’ for
beer. Using a national database on incidents of child abuse and neglect, they
estimate the effects of alcohol control policies in reducing child abuse
measured as the number of children with confirmed or suspected reports of
child maltreatment and the number of children who die as a result of abuse
or neglect. Results indicate that higher excise taxes on alcohol may be
effective in reducing the incidence of child maltreatment.
In Chapter 3, Dr. Resul Cesur of Georgia State University, Dr. Chris
M. Herbst of Arizona State University, and Dr. Erdal Tekin of Georgia
State University and NBER analyze the impact of child care utilization on
school-age children’s body mass index (BMI). They state that childhood
obesity rates in the United States have increased dramatically over the past
three decades. The growing use of non-parental child care has raised
awareness among health care professionals and policy makers of the
critical role that these settings play in shaping children’s eating and activity
habits. However, little empirical research focuses on the relationship
between child care utilization and children’s weight outcomes. Drawing on
rich data from the Kindergarten Cohort of the Early Childhood
Longitudinal Study (ECLS-K), this chapter makes a number of contribu-
tions to existing research in this area. First, we exploit the longitudinal data
structure in the ECLS-K to construct a multiperiod panel of children, with
information on BMI and child care attendance observed during the fall of
kindergarten and the spring of first, third, fifth, and eighth grades. Second,
xvi Introduction

they specify and estimate a fixed effects quantile regression (FEQR) model
that both differences out time-invariant unobserved heterogeneity and
allows them to address the possibility that non-parental care has hetero-
geneous effects on children’s weight at different points in the BMI
distribution. Finally, they consider different parameterizations of child
care utilization, including participation in various modes of child care as
well as measures of the intensity of participation (e.g., hours).
In Chapter 4, Dr. W. David Bradford of the University of Georgia
observes that time preferences are considered a fundamental characteristic of
economic behavior. Dynamic models of utility maximization have strong
predictions about the effects of different rates of discounting on individual
behavior. In general, we expect that higher rates of discounting lead an
individual to more strongly shift consumption of economic goods to the
present and economic bads to the future, relative to a person with lower
rates of preference for the present. While time preferences are clearly a
fundamental of economic behavior, economists devote surprisingly little
attention to understanding their origins. Some of the earliest modern
theoretical work on the subject was conducted by Paul Samuelson. He
proposed a discount factor that indicates a strength of preference for the
present over the future. For several decades after Samuelson’s work, his
model of discounted utility was the standard conceptual basis for economists’
understanding of intertemporal choice. Since this time, some – though by no
means a great deal of – additional research has been conducted to explore
what factors might contribute to the individual’s level of discounting. Becker
and Mulligan propose a theoretical model of how individuals’ time
preferences change. This research has direct implications for the expected
relationships between (1) important choices a person makes/constraints a
person faces and (2) the strength of their discounting of the future.
While some progress has been made in understanding how time
preferences might be endogenized, and substantial effort has been devoted
to exploring the impact of time preferences on many aspects of economic
life, surprisingly little attention has been paid to the effect of time
preferences on health and health care – despite the fact that many aspects
of health care reflect strongly time-dependent choices. Individual rates of
discounting may affect many aspects of health choice. Conceptual models
of optimal insurance design often explicitly incorporate individual time
preferences (through the introduction of a discount rate) and implicitly
incorporate risk preferences (through the shape of the instantaneous utility
function being maximized). Empirically, however, relatively little is known
about how individual-level time and risk preferences affect selection of
insurance types with varying degrees of riskiness and expected future net
medical costs. This chapter presents a survey of what is known about the
role of time preferences in health-related choices, ranging from risky
behaviors (smoking and illicit drug use), to preventative health care, to
insurance choice. In addition, original research is presented on health care
 Introduction xvii

and health insurance effects of discounting. Finally, the chapter highlights

promising areas for future research.
In Chapter 5, Dr. James Marton of Georgia State University,
Dr. Cynthia S. Searcy of Georgia State University, and Dr. Jennifer
Ghandhi of the University of Alabama question if certain types of children
are differentially affected by children’s health insurance premiums.
Concern over the presence of inequity within the State Children’s Health
Insurance Program (SCHIP) has motivated studies involving demographic
characteristics of SCHIP enrollees, particularly racial disparities among
children enrolled in the program. Minority children are more likely to
disenroll from SCHIP than their white counterparts, but it is unclear
whether these children leave public coverage altogether or whether they
simply move into other categories of public coverage. Some worry that
increases in cost sharing might worsen racial inequity within SCHIP. Our
purpose is to examine the differential short-run effects on children based
on sociodemographic characteristics after the introduction of a $20
monthly family premium in Kentucky’s SCHIP (KCHIP 3) in late 2003.
Drs. Marton and Ghandhi employ a competing risks model (Marton et al.,
2009) in order to differentiate between exits to other forms of public
coverage and exits to no public coverage. The original model shows that
non-white children were 32% more likely to exit within each of the first
three months after the premium increase than white children (po0.01). The
competing hazard model allows them to see that non-white children were
52% more likely to exit public coverage than their white counterparts
(po0.01). The implication is that minority children are more likely to
become uninsured than white children, suggesting that the policy change
adversely affects non-whites.
In Chapter 6, Carolina C. Felix and Dr. David E. Frisvold of Emory
University looks at early childhood education as an investment in health.
He states that there is a growing body of evidence that suggests that early
childhood socioeconomic conditions have lasting economic consequences,
reinforcing and sustaining disparities in health and education. Head Start
is the principal federally funded program through which the United States
invests directly in the human capital of disadvantaged preschool children.
This chapter focuses on whether participation in the Head Start program
influences health behaviors, including smoking and drug use, in adole-
scence. To address this question, Dr. Frisvold begins by reviewing the
literature on the relationship between early childhood circumstances and
long-run health outcomes. Although there is an extensive body of research
on the impact of Head Start participation, there has been little research on
the impact on risky behaviors in adolescence.
The difficulty that arises in examining the effect of Head Start
participation is that selection into Head Start is the result of choices
made by parents and administrators. To examine the potential influence of
selection due to observed characteristics and selection due to unobserved
xviii Introduction

characteristics, Dr. Frisvold follows the methodology developed by Altonji

et al. (2005) to estimate the effect of Head Start participation. Their
strategy is to use the amount of observed selection as a guide for the extent
of unobserved selection. Dr. Frisvold uses this strategy to examine the
impact of Head Start participation on smoking and drug use throughout
adolescence and the extent to which varying degrees of selection on
unobservables influence this relationship. To further understand the
sources of any selection on unobservables, Dr. Frisvold gathers informa-
tion on the required admissions criteria that Head Start centers use to
determine which of the eligible children are offered admission in the center.
Head Start centers are required to admit the most disadvantaged children
using an established ranking, although the criteria used to determine who
are the most disadvantaged can vary across centers. Dr. Frisvold uses data
from Fragile Families and the Early Childhood Longitudinal Study-Birth
Cohort (ECLS-B) to attempt to narrow the bounds on the estimate of the
impact of Head Start participation.
In Chapter 7, Dr. Gulcin Gumus of Florida International University
and IZA, Dr. Jenny F. Homer of the University of Miami, and Dr. Michael
T. French discuss the impact of universal helmet laws on motorcycle riding
and safety. They observe that in 2007, 5,154 motorcyclists were killed and
approximately 103,000 were injured in the United States. Although
motorcycles accounted for only 3 percent of registered vehicles at that
time, motorcyclists were involved in 13 percent of all traffic fatalities.
Studies clearly demonstrate that universal helmet laws can reduce the
likelihood of being killed or severely injured in a crash. Nevertheless, helmet
policies vary across states. As of February 2009, 20 states had universal
helmet laws requiring all riders to wear a helmet, 27 had partial helmet laws
for some riders, and 3 did not have a helmet law.
Drs. Gumus, Homer, and French further investigate the effectiveness of
such policies by focusing on their long-term impact and their effect on
motorcycle use. Using state-level longitudinal data for 1975–2005, they
estimate how the adoption and repeal of universal helmet laws influence
motorcycle safety. In an effort to address the potential endogeneity of
adoption or repeal of helmet laws, they use a dynamic specification that
includes leads and lags of the helmet law adoptions and repeals. Their
results confirm earlier findings that adoption of universal helmet laws
prevents fatalities, whereas repeals lead to increases in fatality rates. They
also show that the effects of both adoption and repeal persist much past the
year the states enact or repeal such laws. In addition, they provide evidence
that helmet laws operate in the intended manner such that they reduce
fatalities mainly by improving safety rather than by reducing motorcycle
riding. These findings have key public health implications for states that
may be considering changes to their existing motorcycle helmet policies.
In Chapter 8, Dr. Jason M. Fletcher of Yale University attempts to
account for racial and ethnic disparities in children’s overweight status at
 Introduction xix

two years of age. Dr. Fletcher observes that recent research has suggested
the presence of large racial/ethnic differences in young children. This chapter
examines whether family factors other than race/ethnicity explain these large
racial/ethnic differences in overweight status of young children. Addition-
ally, this chapter examines previously undocumented determinants of early
childhood overweight status. Dr. Fletcher uses longitudinal nationally
representative sample of children born in 2001 (ECLS-B). Participants come
from diverse socioeconomic and racial/ethnic backgrounds with over-
samples of twins, low and very low birth weight children, and minority
groups. Multivariate logistic regression analyses are used, and data are
weighted to account for the survey design of the data set.
Dr. Fletcher finds evidence that although there are large racial/ethnic
differences in the prevalence of being overweight as early as two years of age,
these differences can be accounted for by controlling for a small set of family
characteristics, including marital status and whether English is the primary
language spoken at home. This chapter also presents new findings on the
determinants of early childhood overweight status. For example, evidence
suggests that parental activities with their young children, such as playing
chasing games and walking/playing outside, are associated with lower odds
of early overweight status. Dr. Fletcher concludes that family factors other
than race/ethnicity may account for the large racial/ethnic differences in
early childhood overweight status that have been found in previous research.
Health investments in young children targeted to children from single-parent
households and from households with low English language skills may be
efficient. He also states that additional research is required to examine the
mechanisms that confer high overweight rates on children from single-family
and non-native households.
In Chapter 9, Dr. Jasmina Spasojevic discusses the results of a natural
experiment on the effects of education on adult health in Sweden.
Dr. Spasojevic states that understanding health determinants and their
mechanisms affecting health is an important social policy issue. Empirical
tests in the health literature abound with the undisputed finding that the
number of years of formal schooling completed is the most important
correlate of good health. There is less consensus as to whether this
correlation reflects a causal relationship of more schooling to better health.
This chapter capitalizes on a unique social experiment – the 1950 Swedish
comprehensive school reform that was implemented in stages and by
municipal areas. Consequently, people born between 1945 and 1955 went
through two different school systems (one of which required at least one
more year of schooling). This chapter uses the instrumental variables (IV)
technique to estimate formal schooling’s causal effect on adult health in
Sweden. The instrumental variable for degree of education (schooling)
generated from compulsory school reform yields a consistent estimate of
education’s causal impact on health as measured by an index of bad health
and of BMI in the healthy range. Dr. Spasojevic finds that the additional
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