Health Returns to Medical Expenditures and Medical Expenditure Components across Age Groups
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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.