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The Risk and Duration of Catastrophic Health Care Expenditures

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  • Daniel Feenberg
  • Jonathan Skinner

Abstract

Catastrophic medical expenses are an important economic risk facing the elderly. Little is known about the persistence of such out-of-pocket medical costs. We measure the time-series property of medical costs using information on medical deductions from a panel of tax returns. During the period of analysis, 1968-73, taxpayers could deduct medical expenses above 3 percent of income. We correct for the resulting censoring bias using multivariate Tobit estimated with a variant of the smoothed simulated maximum likelihood (SSML) method. The data suggest that the burden of out-of-pocket medical expenses is substantially larger for lower income families. Furthermore, the estimated coefficients suggest substantial time-persistence in out-of-pocket medical care costs; a $1 increase in out-of-pocket medical spending is predicted to increase future spending by an additional $2.80. These results may shed light both on the social value of catastrophic health insurance as well on aggregate saving behavior.

Suggested Citation

  • Daniel Feenberg & Jonathan Skinner, 1992. "The Risk and Duration of Catastrophic Health Care Expenditures," NBER Working Papers 4147, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4147
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    1. Venti, Steven F. & Wise, David A., 1991. "Aging and the income value of housing wealth," Journal of Public Economics, Elsevier, vol. 44(3), pages 371-397, April.
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