Preventive vs. Curative Medicine: A Macroeconomic Analysis of Health Care over the Life Cycle

Ozkan, Serdar

doi:10.20955/wp.2023.025

Working Paper

Preventive vs. Curative Medicine: A Macroeconomic Analysis of Health Care over the Life Cycle

Abstract: This paper studies differences in health care usage and health outcomes between low- and high-income individuals. Using data from the Medical Expenditure Panel Survey (MEPS) I find that early in life the rich spend significantly more on health care, whereas from midway through life until very old age the medical spending of the poor dramatically exceeds that of the rich. In addition, low-income individuals are less likely to incur any medical expenditures in a given year, yet, when they do incur medical expenditures, the amounts are more likely to be extreme. To account for these facts, I develop and estimate a life-cycle model of two distinct types of health capital: preventive and physical. Physical health capital determines survival probabilities, whereas preventive health capital governs the endogenous distribution of shocks to physical health capital, thereby controlling the life expectancy. Moreover, I incorporate important features of the U.S. health care system such as private health insurance, Medicaid, and Medicare. In the model, optimal expected life span is longer for the rich, which can only be achieved by greater investment in preventive health capital. Therefore, as they age, their health shocks grow milder compared to those of the poor, and in turn they incur lower curative medical expenditures. Public insurance for the elderly amplifies this mechanism by hampering the incentives of the poor to invest in preventive health capital. I use the model to examine a counterfactual economy with universal health insurance in which 75% of preventive medical spending is reimbursed on top of existing coverage in the benchmark economy. My results suggest that policies encouraging the use of health care by the poor early in life produce significant welfare gains, even when fully accounting for the increase in taxes required to pay for them.

Keywords: health production; health inequality; health reform; social insurance;

JEL Classification: D52; D91; E21; E61; E65; I12; I14;

https://doi.org/10.20955/wp.2023.025