Medical consumption over the life-cycle

Abstract

In this paper we construct life-cycle profiles of U.S. health care spending using data from the Medical Expenditure Panel Survey (MEPS). We separate pure age effects on health expenditure from time effects (i.e. productivity effects, business cycle effects, etc.) and cohort effects (i.e. initial condition effects) by estimating a seminonparametric partial linear model. After controlling for time and cohort effects, we find that medical expenditure-age profiles follow an upward trend. Time and cohort effects introduce a significant estimation bias into predictions of health expenditures per age group. It is demonstrated that failing to adequately control for time and cohort effects results in an overprediction of the effect of age on health expenditures, especially for agents older than 60. Cohort effect biases dominate time effect biases in estimates of health expenditures that do not adequately control for both effects. Estimation biases introduced by cohort effects increase monotonically with age while time effects are non-monotone.