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Aging and Health Financing in the US:A General Equilibrium Analysis

Author

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  • Juergen Jung
  • Chung Tran
  • Matthew Chambers
Abstract
We quantify the effects of population aging on the US healthcare system. Our analysis is based on a stochastic general equilibrium overlapping generations model of endogenous health accumulation calibrated to match pre-2010 U.S. data. We find that population aging not only leads to large increases in medical spending but also a large shift in the relative size of public vs. private insurance. Without the Affordable Care Act (ACA), aging itself leads to a 36:6 percent increase in health expenditures by 2060 and a 5 percent increase in GDP which is driven by the expansion of the healthcare sector. The group-based health insurance (GHI) market shrinks, while the individual-based health insurance (IHI) market and Medicaid expand significantly. Additional funds equivalent to roughly 4 percent of GDP are required to finance Medicare in 2060 as the elderly dependency ratio increases. The introduction of the ACA increases the fraction of insured workers to 99 percent by 2060, compared to 81 percent without the ACA. This additional increase is mainly driven by the further expansion of Medicaid and the IHI market and the stabilization of the GHI market. Interestingly, the ACA reduces aggregate health care spending by enrolling uninsured workers into Medicaid which pays lower prices for medical services. Overall, the ACA adds to the fiscal cost of population aging mainly via the Medicare and Medicaid expansion.

Suggested Citation

  • Juergen Jung & Chung Tran & Matthew Chambers, 2016. "Aging and Health Financing in the US:A General Equilibrium Analysis," ANU Working Papers in Economics and Econometrics 2016-641, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2016-641
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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp641.pdf
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Healthcare costs in the US
      by Christian Zimmermann in NEP-DGE blog on 2016-03-29 20:14:40

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    Cited by:

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    2. Conesa, Juan Carlos & Kehoe, Timothy J. & Nygaard, Vegard M. & Raveendranathan, Gajendran, 2020. "Implications of increasing college attainment for aging in general equilibrium," European Economic Review, Elsevier, vol. 122(C).
    3. Juergen Jung, 2022. "Estimating transition probabilities between health states using US longitudinal survey data," Empirical Economics, Springer, vol. 63(2), pages 901-943, August.
    4. Jung, Juergen & Tran, Chung, 2022. "Social health insurance: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    5. Guner, Nezih & Kulikova, Yuliya & Llull, Joan, 2018. "Reprint of: Marriage and health: Selection, protection, and assortative mating," European Economic Review, Elsevier, vol. 109(C), pages 162-190.
    6. Svetlana Pashchenko & Ponpoje Porapakkarm, 2019. "Reducing Medical Spending of the Publicly Insured: The Case for a Cash-out Option," American Economic Journal: Economic Policy, American Economic Association, vol. 11(3), pages 390-426, August.
    7. Fehr, Hans & Feldman, Maria, 2024. "Financing universal health care: Premiums or payroll taxes?," European Economic Review, Elsevier, vol. 166(C).
    8. Woodland, A., 2016. "Taxation, Pensions, and Demographic Change," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 713-780, Elsevier.
    9. Jiang, Yunyun & Zhao, Tianhao & Zheng, Haitao, 2021. "Population aging and its effects on the gap of urban public health insurance in China," China Economic Review, Elsevier, vol. 68(C).
    10. Feldman, Maria & Pretnar, Nick, 2023. "The Causal Factors Driving the Rise in U.S. Health-services Prices," MPRA Paper 118169, University Library of Munich, Germany.
    11. Xie, Yuantao & Yu, Haichun & Lei, Xin & Lin, Arthur Jin, 2020. "The impact of fertility policy on the actuarial balance of China’s urban employee basic medical insurance fund–The selective two-child policy vs. the universal two-child policy," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    12. Jinqi Ye & Ziyan Chen & Bin Peng, 2021. "Is the demographic dividend diminishing in China? Evidence from population aging and economic growth during 1990–2015," Review of Development Economics, Wiley Blackwell, vol. 25(4), pages 2255-2274, November.
    13. Kostova, Deliana & Nugent, Rachel & Richter, Patricia, 2021. "Noncommunicable disease outcomes and the effects of vertical and horizontal health aid," Economics & Human Biology, Elsevier, vol. 41(C).

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    More about this item

    Keywords

    Population aging; calibrated general equilibrium OLG model; health expenditures; Medicare & Medicaid; Affordable Care Act 2010; Grossman model of health capital; endogenous health spending and financing.;
    All these keywords.

    JEL classification:

    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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