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Hedging Medical Spending Growth: An Adaptive Expectations Approach

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  • Robert D. Lieberthal

Abstract

Long-term health insurance provides consumers with protection against persistent, negative health shocks. While the stochastic rise in medical spending growth may make some health risks harder to insure, financial assets could act as a hedge for medical spending growth risk. The purpose of this research was to determine whether such hedges exist. The results of this study were two-fold. First, the asset classes with the strongest statistical evidence as hedges were bonds, not stocks. Second, any strategy to hedge medical spending growth involved shorting assets i.e. betting against the bond or stock market. Health insurers writing long-term contracts should combine the use of hedges in the bond market with of portfolio diversification, and may benefit from health policies to moderate the uncertainty of medical spending growth.

Suggested Citation

  • Robert D. Lieberthal, 2016. "Hedging Medical Spending Growth: An Adaptive Expectations Approach," Applied Finance and Accounting, Redfame publishing, vol. 2(2), pages 57-64, August.
    • Handle: RePEc:rfa:afajnl:v:2:y:2016:i:2:p:57-64
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Medical spending growth; Cost curve; Healthcare finance; Long-term health insurance;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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