Aging and Health Financing in the U.S. - A General Equilibrium Analysis

Towson University Department of Economics Working Paper No. 2016-04

56 Pages Posted: 27 Mar 2017 Last revised: 17 Apr 2017

See all articles by Juergen Jung

Juergen Jung

Towson University - Department of Economics

Chung Tran

Australian National University (ANU) - School of Economics

Matthew Chambers

Towson University

Date Written: April 17, 2017

Abstract

We quantify the effects of population aging on the U.S. 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 private vs. public insurance. Without the Affordable Care Act (ACA), aging by itself leads to a 40 percent increase in health expenditures by 2060 and a 9.6 percent increase in GDP which is mainly driven by the increase of the fraction of older higher-risk individuals in the economy as well as behavioral responses to aging and the subsequent expansion of the healthcare sector. Aging increases the premium in group-based health insurance (GHI) markets and enrollment in GHI decreases, while the individual-based health insurance (IHI) market, Medicaid and Medicare expand significantly. The size of Medicare will double by 2060 as the elderly dependency ratio increases. Additional funds equivalent to roughly 2.8 percent of GDP are required to finance Medicare and Medicaid. The introduction of the ACA increases the fraction of insured workers to almost 100 percent by 2060, compared to 82 percent without the ACA. This increase is driven by the stabilization of GHI markets and the further expansions of Medicaid and the IHI market. The ACA mitigates the increase of healthcare costs by reducing the number of the uninsured who pay the highest market price for healthcare services. Overall, the ACA adds to the fiscal cost of population aging mainly via the Medicaid expansion. Our findings demonstrate the importance of accounting for behavioral responses, structural changes in the healthcare sector and general equilibrium adjustments when assessing the economy-wide effects of aging.

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

JEL Classification: C68, H51, I13, J11, E21, E62

Suggested Citation

Jung, Juergen and Tran, Chung and Chambers, Matthew, Aging and Health Financing in the U.S. - A General Equilibrium Analysis (April 17, 2017). Towson University Department of Economics Working Paper No. 2016-04, Available at SSRN: https://ssrn.com/abstract=2940458 or http://dx.doi.org/10.2139/ssrn.2940458

Juergen Jung (Contact Author)

Towson University - Department of Economics ( email )

Baltimore, MD
United States
812-345-9182 (Phone)

HOME PAGE: http://https://juejung.github.io/

Chung Tran

Australian National University (ANU) - School of Economics ( email )

Arndt Building 25B
Canberra, Australian Capital Territory 0200
Australia

Matthew Chambers

Towson University ( email )

8000 York Road, ST 100A
Towson, MD 21204
United States

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