Tuesday, September 18, 2012

General Electric's Natural Experiment: The Demand for Health Care is Pretty Elastic

The WSJ reports that  General Electric just ran an experiment in which it sharply increased the medical deductible that its workers have to pay for health care.  Here is the key quote; "In the first two years after the plan went into effect, use of advanced imaging including MRIs and CT scans has dropped by as much as a quarter, as covered employees' overall use of health services fell, according to the company."

The CEO of General Electric could publish this in the QJE?   

The article goes on to say that GE as a company has a problem because as other private companies raise their medical deductibles demand for MRI and CT Scans will decline.  GE sells these devices and thus will suffer a profit loss from the aggregate change in demand for its high tech services.  

So, this article has two pieces of interesting economics.  1. Demand curves do slope down!  2.  Health expenditure is a cost for some firms and represents revenue for other firms so changes in health care demand due to shifting incentives will have wide reaching effects on major companies.  This is general equilibrium at work!