Accounting for the Rise of Health Spending and Longevity

We estimate a life-cycle model of 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 find that technological change (31%) and the increase in the generosity of health insurance (5%) on their own may explain 36% of the rise in health spending, while income explains 4%. By simultaneously occurring, these changes may have led to complementarity effects which explain an additional 59% increase. The estimates suggest that the sensitivity of health spending to income and to insurance is larger with co-occurring improvements in technology. Technological change (increased health-care productivity) explains almost all of the rise in life expectancy at age 25 over the period; welfare gains are substantial and 70% appear to be due to technological change.