Abstract
Medical expenditures as a
percentage of GDP have doubled during the past three decades, reflecting
technology advancement and an aging population. Understanding how
medical expenditures affect health, and whether this relationship
differs by important sociodemographic characteristics such as age, are
important for the appropriate allocation of scarce health care
resources. Given the current environment of health care reform, further
evidence on the health returns to medical investment is both timely and
policy-relevant. This study focuses on health returns to medical
spending for the adult population in the United States. It assesses
health benefits from overall medical expenditures as well as medical
expenditure components (pharmaceutical expenditure and spending on
physician services). I consider both objective (EuroQoL) and subjective
(rating scale) measures of health. The conceptual point of departure for
this study is Grossman ’ classic model of health investment. This
study employs two-stage least squares estimation techniques to address
the endogeneity of individual medical expenditures (e.g., that sicker
people spend more). Using the objective health measure, the elasticity
of overall medical expenditure with respect to health is approximately
0.26. That is, a 10% increase in medical expenditures increases health
by 2.6%. For subjective measure, the elasticity of overall medical
expenditure is 0.19. However, the returns to medical expenditures differ
by age group and whether I use an objective or subjective health
measure. Using the objective measure, the returns to medical expenditure
are greatest for the middle-aged group (e.g., 46 to 64 years of age).
However, using the subjective measure, I find that the perceived returns
to health are greatest for seniors (e.g., > 64 years of age) cohort.
If objective health measures provide better evidence of actual gains in
health, these findings suggest that reallocation of spending from
seniors towards middle-aged cohorts can improve overall health without
affecting expenditures. Given the strong perceived benefit for medical
expenditures among seniors, however, such a reallocation may meet with
considerable resistance. To better understand the source of health
benefit for different age groups, health returns to medical expenditure
components are further examined (prescription drug expenditure and
physician services expenditure). I find that middle-age group and
younger population gain positive health returns (captured by objective
measure: health-related quality of life) from prescription expenditure,
while no statistically significant correlation has been found between
health benefit and prescription drug expenditures for seniors. The
period of this study was before the Medicare Part D plan was
implemented. Prescription compliance among seniors may have been
adversely affected by limited coverage during this period, which could
account for this result. Considering the relationship between physician
services spending and health outcome, the results suggest that senior
group gains higher health returns (captured by subjective health
measure: self-rated health status) comparing to the middle-age and
younger group. It indicates that senior group may yield higher
“ perceived ” health benefit from office-based
visits , where the type of care is “ face-to-face ”
contact. These findings could inform public policies designed to more
closely match specific types of care with those groups likely to benefit
the most from them.
