GROWTH OF U.S. HEALTH CARE SPENDING

Ralph Bradley

Contemporary Economic Policy, 1994, vol. 12, issue 4, 45-56

Abstract: The share of output allocated to health care has more than doubled since 1960. This paper models the growth in this ratio and finds that the increase in the elderly population whose medical spending is heavily subsidized is a key factor behind this growth. Technological change is a symptom of the medical market structure rather than a cause of medical spending growth. The econometric model in the analysis here is based on a micro model composed of two groups. The first group is a healthier group that makes income transfers in order to finance the sicker group's health insurance premiums. In this model, a technical constraint places an upper bound on the healing ability of the medical good. This upper bound changes through an unobservable endogenous process. Estimating the health care model involves using estimation techniques that bypass the need to make any a priori assumptions about the functional form of the regressions or about the distribution of the residuals. The results suggest that technical change cannot indefinitely induce health care spending growth if no subsidies exist that provide full health care coverage with premiums fully paid by the subsidy. If subsidies provide full coverage and pay the entire premium, then new technical discoveries can induce constantly expanding medical expenditures.

Date: 1994
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