Economics - General Prevention

Preventive care as an insurance policy

Joe Newhouse has a nice overview article on the value of preventive care in the latest edition of the Journal of Economic Literature. He makes three key points:

  1. Preventive care may save money, but often does not. That does not mean that they are not high value. Preventive care should be seen as an insurance policy against future health risks, not as a current day cost saving measure.
  2. Preventive care is heterogenous in its value. COVID-19 vaccines have huge positive value. Yet just because an intervention is preventive, doesn’t mean it is high value. There is significant heterogeneity in value both across interventions as well as in terms of how those interventions impact vary based on patient characteristics.
  3. Preventive care should be covered generously. Newhouse argues that health insurance coverage should cover preventive services more generously than non-preventive treatments. This could be due to externalities, non-rational behavior (e.g., hyperbolic discounting), incentives of life science companies to invest in treatments that don’t require long clinical trials, and other factors.

Regarding the first point, Newhouse explains how preventive care can act as a type of “insurance” policy in more detail:

Despite the widespread belief among the general public that medical preventive measures save money, they frequently do not. Even more important, whether a preventive measure is welfare-increasing does not depend on whether it saves money any more than the welfare judgement on whether or how to treat a disease such as cancer depends on whether it saves money. Both medical prevention and medical treatment sometime save money, but often neither do. From an economic perspective, a preventive activity is effectively an insurance policy that requires some cost in the present for a future benefit with an expected positive value…

Whereas the intent of conventional insurance is to protect against financial risk or variation in income level, the intent of a preventive measure is to protect against health risk or variation in health level. Furthermore, because health and earnings capability are related, if a preventive measure reduces future sick time and/or raises future productivity, it could increase lifetime income and the future stream of consumption, just as the smoothing of consumption from conventional insurance could affect health states.

I also especially enjoyed the start of this article:

Benjamin Franklin (1735) advised that the marginal rate of substitution between prevention and cure had a constant value of –16, although he didn’t put it in exactly those terms.


  • Newhouse, Joseph P. 2021. “An Ounce of Prevention.” Journal of Economic Perspectives, 35 (2): 101-18.

Leave a Reply

Your email address will not be published. Required fields are marked *