ESTIMATING MARGINAL RETURNS TO MEDICAL CARE: EVIDENCE FROM AT-RISK NEWBORNS

Abstract

A key policy question is whether the benefits of additional medical expenditures exceed their costs. We propose a new approach for estimating marginal returns to medical spending based on variation in medical inputs generated by diagnostic thresholds. Specifically, we combine regression discontinuity estimates that compare health outcomes and medical treatment provision for newborns on either side of the very low birth weight threshold at 1500 grams. First, using data on the census of US births in available years from 1983-2002, we find that newborns with birth weights just below 1500 grams have lower one-year mortality rates than do newborns with birth weights just above this cutoff, even though mortality risk tends to decrease with birth weight. One-year mortality falls by approximately one percentage point as birth weight crosses 1500 grams from above, which is large relative to mean infant mortality of 5.5% just above 1500 grams. Second, using hospital discharge records for births in five states in available years from 1991-2006, we find that newborns with birth weights just below 1500 grams have discontinuously higher charges and frequencies of specific medical inputs. Hospital costs increase by approximately $4,000 as birth weight crosses 1500 grams from above, relative to mean hospital costs of $40,000 just above 1500 grams. Under an assumption that observed medical spending fully captures the impact of the "very low birth weight" designation on mortality, our estimates suggest that the cost of saving a statistical life of a newborn with birth weight near 1500 grams is on the order of $550,000 in 2006 dollars.

Figure I. Frequency of births by gram: Population of US births between 1350–1650 grams

Notes: NCHS birth cohort linked birth/infant death files, 1983–1991 and 1995–2003, as described in the text.

Figure II. One-year and 28-day mortality around 1500 grams

Notes: NCHS birth cohort linked birth/infant death files, 1983–1991 and 1995–2003, as described in the text. Points represent gram-equivalents of ounce intervals, with births grouped into one-ounce bins radiating from 1500 grams; the estimates are plotted at the median birth weight in each bin.

Figure III. Summary treatment measures around 1500 grams

Notes: Data are all births in the five-state sample (AZ, CA, MD, NY, and NJ), as described in the text. Charges are in 2006 dollars. Points represent gram-equivalents of ounce intervals, with births grouped into one-ounce bins radiating from 1500 grams; the estimates are plotted at the median birth weight in each bin.

Figure IV. Specific treatment measures around 1500 grams

Notes: Data are all births in the five-state sample (AZ, CA, MD, NY, and NJ), as described in the text. Points represent gram-equivalents of ounce intervals, with births grouped into one-ounce bins radiating from 1500 grams; the estimates are plotted at the median birth weight in each bin.

Figure V. Covariates around 1500 grams

Notes: NCHS birth cohort linked birth/infant death files, 1983–1991 and 1995–2003, as described in the text. Points represent gram-equivalents of ounce intervals, with births grouped into one-ounce bins radiating from 1500 grams; the estimates are plotted at the median birth weight in each bin.

Figure VI. First stage versus reduced form, by NICU quality level

Notes: Plot of first stage coefficients (for 2006 charges, in levels) and reduced form coefficients (for one-year mortality) by NICU level in our California data. See text for details on the NICU classifications.