An Analysis of Health Care Expenditures and Life Expectancy

The prevailing wisdom is that the introduction of effective means to treat aging will reduce health care costs. After all, most expenditures are generated in the final stages of life, during the expensive and eventually futile process of trying to prevent the failure of constantly near-failing organs and systems. Operating a damaged machine is expensive and challenging: there is no way around that without repairing the damage. This is as true for us as for a car or a lawnmower, and the ability to repair the underlying causes of aging will indefinitely postpone the end stage of frailty and high mortality rates, and indefinitely prolong the low-cost stage of life in which little is spent on medicine.

At present, however, changes in life expectancy are not driven by treatments for aging. Rather there is an incidental increase due to generally better medicine throughout life, leading to a somewhat lower level of damage at a given age, and then there are improvements in the ability to postpone mortality without repairing the underlying causes of age-related disease. Better treatments for heart disease, stem cell therapies to temporarily revert some of the damage caused by aging, and so forth. So the dynamic is different, and leaves room to argue that increasing life expectancy under the present model of medical development can increase costs. Even so, it is clearly and obviously the case that adoption of the better approach - addressing the causes of aging - will lower costs.

It is still an open question whether increasing life expectancy as such causes higher health care expenditures (HCE) in a population. According to the "red herring" hypothesis, the positive correlation between age and HCE is exclusively due to the fact that mortality rises with age and a large share of HCE is caused by proximity to death. As a consequence, rising longevity - through falling mortality rates - may even reduce HCE. However, a weakness of many previous empirical studies is that they use cross-sectional evidence to make inferences on a development over time.

In this paper, we analyse the impact of rising longevity on the trend of HCE over time by using data from a pseudo-panel of German sickness fund members over the period 1997-2009. Using (dynamic) panel data models, we find that age, mortality and 5-year survival rates each have a positive impact on per-capita HCE. Our explanation for the last finding is that physicians treat patients more aggressively if the results of these treatments pay off over a longer time span, which we call "Eubie Blake effect". A simulation on the basis of an official population forecast for Germany is used to isolate the effect of demographic ageing on real per-capita HCE over the coming decades. We find that, while falling mortality rates as such lower HCE, this effect is more than compensated by an increase in remaining life expectancy so that the net effect of ageing on HCE over time is clearly positive.



Even under the prevailing medical model, we should fight back against the notion that extending human life-expectancy should be rejected on account of costs.

Posted by: Therapsid at March 7th, 2014 8:36 AM
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