On the Rise of Health Spending and Longevity

We use a calibrated stochastic life-cycle model of endogenous health
spending, asset accumulation and retirement to investigate the causes
behind the increase in health spending and life expectancy over the period
1965-2005. We estimate that technological change along with the increase
in the generosity of health insurance may explain independently 53% of the
rise in health spending (insurance 29% and technology 24%) while income
explains less than 10%. By simultaneously occurring over this period, these
changes may have lead to a “synergy” or interaction effect which helps
explain an additional 37% increase in health spending. We estimate that
technological change, taking the form of increased productivity at an annual
rate of 1.8%, explains 59% of the rise in life expectancy at age 50 over this
period while insurance and income explain less than 10%.