The second half of the twentieth century recorded a rapid growth in health care spending and a significant increase in life expectancy. This paper hypothesizes that the combination of techno-logical progress in medical treatment and rising incomes is the driving force behind these two trends. Using a stochastic, multi-period overlapping-generations model as the analytical vehicle, this paper argues that the rapid growth in medical spending is not driven by factors associated with market structures or insurance opportunities, but instead by factors underlying the production and accumulation of health. According to this model, improvements in medical treatment and rising incomes can explain all of the increase in medical spending and more than 60% of the increase in life expectancy at age 25 during the second half of the twentieth century.
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