Medical Progress, Health Expenditure and Population Ageing

The nexus of population ageing, health expenditure and medical progress attracts great political and academic interest. While empirical work reveals the mutual dependence of the three phenomena, little is yet known about (i) the nature of the dynamic interrelationship; (ii) the incentives for individuals, medical providers and innovators, whose decisions drive the process; and (iii) the way in which these incentives and the resulting outcomes are affected by policy-making. This project develops, solves and numerically implements an intertemporal general equilibrium model with overlapping generations subject to endogenous mortality, the latter depending on individual health care and medical technology. In so doing, we explicitly study a three sector model, where a medical sector (e.g. hospitals) and an R&D sector developing medical technology operate beside a production sector. We derive from individual choice an age-specific demand for health care as well as its underlying value. Aggregating across cohorts, we show how the total demand for health care translates, via the medical sector, into a demand for medical innovation. We assess the efficiency of the allocation and how it depends on the competitive and institutional environment. Specifically, we contrast the decentral allocation against a first-best solution, which we derive using age-structured optimal control techniques. Calibrating the model to US and European data, we examine numerically how the dynamics are shaped by the nature of medical technology, by population change (e.g. exogenous ageing, baby-boom/bust) and by policy (e.g. health insurance, provider regulation, patent policy). Our numerical model allows us to trace the out-of-steady-state dynamics. We study the sustainability of current health care policies under population ageing and derive optimal policies. The project advances the literature by expanding and integrating different strands of theoretical and empirical insights into a coherent general equilibrium framework with a realistic demography and endogenous mortality; and by applying this model in numerical exercises to understand health policy options in the face of the triple dynamics of ageing, health expenditure, and medical progress.

No additional funding sources recorded.