We document substantial interregional trade in medical services and investigate whether regional economies of scale explain it. In Medicare data, one-fifth of production involves a doctor treating a patient from another region. Larger regions produce greater quantity, quality, and variety of medical services, which they “export” to patients from smaller regions. These patterns reflect scale economies: greater demand enables larger regions to improve quality, so they attract patients from elsewhere. Contrary to concerns that production is too concentrated, we estimate that larger regions have higher marginal returns. We study counterfactual policies that would lower travel costs rather than relocating production.

I empirically investigate the trade-off between accuracy and interpretability in Medicare Advantage risk adjustment models. I introduce a formal metric for model complexity in payment policy, which equates complexity to the number of coefficients in a model, a factor central to stakeholder interpretation of payment rates. Machine learning models significantly improve prediction accuracy and robustness to upcoding but also dramatically increase complexity. An analysis of policymakers’ preferences reveals that these models likely do not justify their additional complexity. Future research should explore aligning machine learning advances with payment policy constraints.

 

Standard economic models assume that monetary costs are the primary constraint to the use of medical care. However, clinical medicine abounds with situations where the use of effective medical treatments is not constrained by monetary costs but by the negative side effects of treatments, which I refer to as “health costs”. Navigating these trade-offs is referred to clinically as “the art of medicine.” I model these trade-offs by making a simple but substantive change to standard economic models of healthcare consumption. Medical treatments have a health cost. Treatment improves health in one dimension but harms it in another, constraining healthcare use. Patients whose medical care is constrained by health costs are unresponsive to monetary price changes. The model provides further predictions about situations in which price will be an effective policy lever and in which moral hazard will be limited. It also provides economists with a framework for thinking about clinical tradeoffs, a central driver of patterns of healthcare consumption.