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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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    Cited by:

    1. Frankovic, Ivan & Kuhn, Michael, 2018. "Health insurance, endogenous medical progress, and health expenditure growth," ECON WPS - Working Papers in Economic Theory and Policy 01/2018, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.
    2. Jung, Juergen & Tran, Chung, 2022. "Social health insurance: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    3. Frankovic, Ivan & Kuhn, Michael & Wrzaczek, Stefan, 2017. "Medical progress, demand for health care, and economic performance," ECON WPS - Working Papers in Economic Theory and Policy 08/2017, TU Wien, Institute of Statistics and Mathematical Methods in Economics, Economics Research Unit.
    4. Ivan Frankovic & Michael Kuhn & Stefan Wrzaczek, 2020. "On the Anatomy of Medical Progress Within an Overlapping Generations Economy," De Economist, Springer, vol. 168(2), pages 215-257, June.
    5. Volha Lazuka, 2022. "Household and individual economic responses to different health shocks: The role of medical innovations," Papers 2206.03306, arXiv.org.
    6. 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.
    7. Mariacristina De Nardi & Svetlana Pashchenko & Ponpoje Porapakkarm, 2017. "The Lifetime Costs of Bad Health," Working Papers 2017-079, Human Capital and Economic Opportunity Working Group.
    8. 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.
    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. 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.
    11. 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.
    12. Volker Grossmann, 2021. "Medical Innovations and Ageing: A Health Economics Perspective," CESifo Working Paper Series 9387, CESifo.
    13. FUKAI Taiyo & ICHIMURA Hidehiko & KITAO Sagiri & MIKOSHIBA Minamo, 2021. "Medical Expenditures over the Life Cycle: Persistent Risks and Insurance," Discussion papers 21073, Research Institute of Economy, Trade and Industry (RIETI).
    14. Hui He & Kevin X.D. Huang & Lei Ning, 2021. "Why Do Americans Spend So Much More On Health Care Than Europeans?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(4), pages 1363-1399, November.
    15. Lazuka, Volha, 2021. "Heterogeneous Returns to Medical Innovations," Lund Papers in Economic History 225, Lund University, Department of Economic History.
    16. Ivan Frankovic & Michael Kuhn & Stefan Wrzaczek, 2020. "On the Anatomy of Medical Progress Within an Overlapping Generations Economy," De Economist, Springer, vol. 168(2), pages 215-257, June.
    17. Titus Galama, 2011. "A Contribution to Health Capital Theory," Working Papers WR-831, RAND Corporation.
    18. Dierk Herzer, 2022. "The macro‐level effect of religiosity on health," Health Economics, John Wiley & Sons, Ltd., vol. 31(6), pages 993-1011, June.
    19. 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.
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    More about this item

    Keywords

    health spending; longevity; life-cycle models; technological change;
    All these keywords.

    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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