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Aging and Health Financing in the U.S. A General Equilibrium Analysis

Author

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  • Juergen Jung

    (Department of Economics, Towson University)

  • Chung Tran

    (Research School of Economics, The Australian National University)

  • Matthew Chambers

    (Department of Economics, Towson University)

Abstract

We quantify the effects of population aging on the U.S. healthcare system. Our analysis is based on a stochastic general equilibrium overlapping generations model of endogenous health accumulation calibrated to match pre-2010 U.S. data. We find that population aging not only leads to large increases in medical spending but also a large shift in the relative size of private vs. public insurance. Without the Affordable Care Act (ACA), aging by itself leads to a 40 percent increase in health expenditures by 2060 and a 9.6 percent increase in GDP which is mainly driven by the increase of the fraction of older higher-risk individuals in the economy as well as behavioral responses to aging and the subsequent expansion of the healthcare sector. Aging increases the premium in group-based health insurance (GHI) markets and enrollment in GHI decreases, while the individual-based health insurance (IHI) market, Medicaid and Medicare expand significantly. The size of Medicare will double by 2060 as the elderly dependency ratio increases. Additional funds equivalent to roughly 2.8 percent of GDP are required to finance Medicare and Medicaid. The introduction of the ACA increases the fraction of insured workers to almost 100 percent by 2060, compared to 82 percent without the ACA. This increase is driven by the stabilization of GHI markets and the further expansions of Medicaid and the IHI market. The ACA mitigates the increase of healthcare costs by reducing the number of the uninsured who pay the highest market price for healthcare services. Overall, the ACA adds to the fiscal cost of population aging mainly via the Medicaid expansion. Our findings demonstrate the importance of accounting for behavioral responses, structural changes in the healthcare sector and general equilibrium adjustments when assessing the economy-wide effects of aging.

Suggested Citation

  • Juergen Jung & Chung Tran & Matthew Chambers, 2016. "Aging and Health Financing in the U.S. A General Equilibrium Analysis," Working Papers 2016-04, Towson University, Department of Economics, revised Apr 2017.
  • Handle: RePEc:tow:wpaper:2016-04
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Healthcare costs in the US
      by Christian Zimmermann in NEP-DGE blog on 2016-03-29 20:14:40

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    3. Juergen Jung, 2022. "Estimating transition probabilities between health states using US longitudinal survey data," Empirical Economics, Springer, vol. 63(2), pages 901-943, August.
    4. Jung, Juergen & Tran, Chung, 2022. "Social health insurance: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    5. Jinqi Ye & Ziyan Chen & Bin Peng, 2021. "Is the demographic dividend diminishing in China? Evidence from population aging and economic growth during 1990–2015," Review of Development Economics, Wiley Blackwell, vol. 25(4), pages 2255-2274, November.
    6. Conesa, Juan Carlos & Kehoe, Timothy J. & Nygaard, Vegard M. & Raveendranathan, Gajendran, 2020. "Implications of increasing college attainment for aging in general equilibrium," European Economic Review, Elsevier, vol. 122(C).
    7. Xie, Yuantao & Yu, Haichun & Lei, Xin & Lin, Arthur Jin, 2020. "The impact of fertility policy on the actuarial balance of China’s urban employee basic medical insurance fund–The selective two-child policy vs. the universal two-child policy," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    8. Svetlana Pashchenko & Ponpoje Porapakkarm, 2019. "Reducing Medical Spending of the Publicly Insured: The Case for a Cash-out Option," American Economic Journal: Economic Policy, American Economic Association, vol. 11(3), pages 390-426, August.
    9. Woodland, A., 2016. "Taxation, Pensions, and Demographic Change," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 713-780, Elsevier.
    10. Guner, Nezih & Kulikova, Yuliya & Llull, Joan, 2018. "Reprint of: Marriage and health: Selection, protection, and assortative mating," European Economic Review, Elsevier, vol. 109(C), pages 162-190.
    11. Feldman, Maria & Pretnar, Nick, 2023. "The Causal Factors Driving the Rise in U.S. Health-services Prices," MPRA Paper 118169, University Library of Munich, Germany.
    12. Kostova, Deliana & Nugent, Rachel & Richter, Patricia, 2021. "Noncommunicable disease outcomes and the effects of vertical and horizontal health aid," Economics & Human Biology, Elsevier, vol. 41(C).

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    More about this item

    Keywords

    Population aging; calibrated general equilibrium OLG model; health expenditures; Medicare/Mediaid; Affordable Care Act 2010; Grossman model of health capital; endogenous health spending and financing.;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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