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On the distribution and dynamics of health care costs

Author

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  • Eric French

    (Federal Reserve Bank of Chicago, USA)

  • John Bailey Jones

    (Department of Economics, University at Albany, State University of New York, USA)

Abstract

Using data from the Health and Retirement Survey and the Assets and Health Dynamics of the Oldest Old survey, we estimate the stochastic process that determines both the distribution and dynamics of health care costs. We find that the data-generating process for log health costs is well represented as the sum of a white noise process and a highly persistent AR(1) process. We also find that the innovations to this process can be modelled with a normal distribution that has been adjusted to capture the risk of catastrophic health care costs. Simulating this model, we find that in any given year 0.1% of households receive a health cost shock with a present value of at least $125,000. Copyright © 2004 John Wiley & Sons, Ltd.

Suggested Citation

  • Eric French & John Bailey Jones, 2004. "On the distribution and dynamics of health care costs," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(6), pages 705-721.
    • Handle: RePEc:jae:japmet:v:19:y:2004:i:6:p:705-721
    DOI: 10.1002/jae.790
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    References listed on IDEAS

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    1. Matthew Eichner & Mark B. McClellan & David A. Wise, 1998. "Insurance or Self-Insurance? Variation, Persistence, and Individual Health Accounts," NBER Chapters, in: Inquiries in the Economics of Aging, pages 19-49, National Bureau of Economic Research, Inc.
    2. Eric French & John Bailey Jones, 2011. "The Effects of Health Insurance and Self‐Insurance on Retirement Behavior," Econometrica, Econometric Society, vol. 79(3), pages 693-732, May.
    3. David A. Wise, 1998. "Inquiries in the Economics of Aging," NBER Books, National Bureau of Economic Research, Inc, number wise98-2, March.
    4. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-445, March.
    5. Douglas Rivers & Quang Vuong, 2002. "Model selection tests for nonlinear dynamic models," Econometrics Journal, Royal Economic Society, vol. 5(1), pages 1-39, June.
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