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Accounting for the Rise of Health Spending and Longevity

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  • Raquel Fonseca
  • Pierre-Carl Michaud
  • Arie Kapteyn
  • Titus Galama

Abstract

We estimate a stochastic life-cycle model of endogenous health spending, asset accumulation and retirement to investigate the causes behind the increase in health spending and longevity in the U.S. over the period 1965-2005. We estimate that technological change and the increase in the generosity of health insurance on their own may explain 36.3% of the rise in health spending (technology 31.5% and insurance 4.8%), while income explains only 4.4%. By simultaneously occurring over this period, these changes may have led to complementarity effects which explain an additional 59% increase in health spending. The estimates suggest that the elasticity of health spending with respect to changes in both income and insurance is larger with co-occurring improvements in technology. Technological change, taking the form of increased health-care productivity at an annual rate of 1.7%, explains almost all of the rise in life expectancy at age 25 over this period. Welfare gains are substantial and most of the gain appears to be due to technological change (47% out of a total gain of 67%).

Suggested Citation

  • Raquel Fonseca & Pierre-Carl Michaud & Arie Kapteyn & Titus Galama, 2018. "Accounting for the Rise of Health Spending and Longevity," Cahiers de recherche 1806, Chaire de recherche Industrielle Alliance sur les enjeux économiques des changements démographiques.
  • Handle: RePEc:lvl:criacr:1806
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    References listed on IDEAS

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    Cited by:

    1. Svetlana Pashchenko & Ponpoje (Poe) Porapakkarm & Mariacristina De Nardi, 2017. "The Lifetime Costs of Bad Health," 2017 Meeting Papers 533, Society for Economic Dynamics.
    2. Juergen Jung & Chung Tran, 2015. "Social Health Insurance: A Quantitative Exploration," ANU Working Papers in Economics and Econometrics 2015-629, Australian National University, College of Business and Economics, School of Economics.
    3. Frankovic, Ivan & Kuhn, Michael & Wrzaczek, Stefan, 2017. "Medical progress, demand for health care, and economic performance," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 08/2017, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).
    4. Titus J. Galama & Hans van Kippersluis, 2015. "A Theory of Education and Health," CINCH Working Paper Series 1503, Universitaet Duisburg-Essen, Competent in Competition and Health, revised Mar 2015.
    5. Jung, Juergen & Tran, Chung & Chambers, Matthew, 2017. "Aging and health financing in the U.S.: A general equilibrium analysis," European Economic Review, Elsevier, vol. 100(C), pages 428-462.
    6. Titus Galama, 2011. "A Contribution to Health Capital Theory," Working Papers WR-831, RAND Corporation.
    7. Juergen Jung & Chung Tran, 2018. "Optimal Progressive Income Taxation in a Bewley-Grossman Framework," ANU Working Papers in Economics and Econometrics 2018-662, Australian National University, College of Business and Economics, School of Economics.
    8. Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
    9. Pelgrin, Florian & St-Amour, Pascal, 2016. "Life cycle responses to health insurance status," Journal of Health Economics, Elsevier, vol. 49(C), pages 76-96.
    10. Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
    11. Kelly, Mark, 2017. "Health capital accumulation, health insurance, and aggregate outcomes: A neoclassical approach," Journal of Macroeconomics, Elsevier, vol. 52(C), pages 1-22.

    More about this item

    Keywords

    health spending; longevity; life-cycle models; technological change;

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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