Chapter 8. Economic Analysis of Risk and Uncertainty Induced by Health Shocks: A Review and Extension

We review and extend the economic analysis of mitigating risks in the presence of health shocks. The existing literature is mainly focused on how shocks affect consumption, for example through their impact on medical spending. We argue that this focus is limited in that shocks to health itself, rather than consumption, may be more damaging. Since human capital is not transferrable, health risk—unlike medical spending risk—cannot be pooled through traditional insurance. Instead, medical innovation is the main method of achieving smoothing in health across disease states. We explore the welfare implications of this “health insurance” view of medical R&D . We also review the evidence on how FDA regulations affect overall health risk, as regulations lower health risks of products ex post but raise risk ex ante by discouraging medical innovation. More analysis seems warranted on the relative value of programs aimed at mitigating shocks to health itself by stimulating innovation versus health insurance reforms aimed mainly at consumption smoothing.