Health Economics

By Grossman, Michael | NBER Reporter, Spring 2004 | Go to article overview

Health Economics

Grossman, Michael, NBER Reporter

In the five years since my last report on the NBER's Program in Health Economics, the program has changed from one based mainly in the Bureau's New York office to one with a national presence. The number of program members has increased dramatically. The first group meeting at the Summer Institute was in 2001 and the first spring meeting was held in 2003; these two events now take place on an annual basis. The Program's growth has resulted in a more diversified research portfolio. In my last report, I emphasized studies on the economics of substance use. While I report here on a good deal of new research in this important area, I also summarize studies focusing on the economics of obesity; the roles of such basic economic forces as years of formal schooling completed, unemployment, and welfare reform in health outcomes; and the determinants of the cost of medical care. This research has been supported by grants from the National Institute on Alcohol Abuse and Alcoholism, the National Institute on Drug Abuse, the National Institute on Mental Health, the National Institute of Diabetes and Digestive and Kidney Diseases, the National Institute of Child Health and Human Development, the Agency for Health Care Research and Quality, and the Robert Wood Johnson Foundation.

The Economics of Substance Use

The economics of substance use considers the determinants and consequences of the consumption of such harmfully addictive substances as cigarettes, alcohol, and illegal drugs. The program continues to provide estimates of the effects of control policies on substance use on consumption and related outcomes.


Cigarette excise tax hikes, which result in higher cigarette prices, are one possible tool to discourage smoking. This is particularly important in the case of smoking by pregnant women, since this behavior accounts for one in five low weight babies and is the most important modifiable risk factor for poor pregnancy outcomes. Greg Colman, Ted Joyce, and I find that pregnant women living in states that raised cigarette taxes between 1993 and 1999 were more likely to quit smoking once they became pregnant than women residing in other states. (1) The magnitude of the effect at issue is substantial. If a penny increase in taxes increases price by one cent, then a 10 percent increase in price would increase the probability that a pregnant woman quits smoking by 10 percent. Over one-quarter of the 9 percentage point increase in quit rates that occurred over the sample period can be explained by increases in cigarette taxes during that period. Colman, Joyce, and I estimate that a 30-cent increase in taxes in constant dollars would have the same effect on quit rates as enrolling women in prenatal smoking cessation programs.

John A. Tauras and Frank J. Chaloupka (2); Tauras, Patrick M. O'Malley, and Lloyd D. Johnston (3); Henry Saffer and Dhaval Dave (4); and Tauras and Chaloupka (5) confirm the importance of price as a determinant of a variety of smoking outcomes in different populations. Tauras and Chaloupka report that price hikes encourage young adult smokers to quit smoking, and Tauras, O'Malley, and Johnston report that price hikes discourage teenagers from starting to smoke. Saffer and Dave find that smoking participation by adults with mental illness is as sensitive to price as participation by adults who are not mentally ill. This is an important finding, because a history of mental illness increases smoking participation (relative to participation in the overall population) by 94 percent. It suggests that tobacco taxes are a valuable policy tool to discourage smoking, even in populations with high participation rates. Tauras and Chaloupka show that decreases in the price of nicotine replacement therapies and increases in the price of cigarettes lead to substantial increases in per capita sales of nicotine replacement therapy products. Hence, the decision to quit depends not only on the cost of cigarettes but also on the cost of techniques that enable smokers to quit. …

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Health Economics


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