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On the distribution and dynamics of health costs

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  • Eric French
  • John Bailey Jones

Abstract

Using data from the Health and Retirement Survey (HRS) and Assets and Health Dynamics of the Oldest Old (AHEAD), this paper presents estimates of the stochastic process that determines both the distribution and dynamics of health costs. We find that the data generating process for health costs is well represented by an ARMA(1,1). Furthermore, innovations to this process are close to lognormally distributed. In any given year, .1% of our sample receives a health cost shock that costs at least $80,000 in present value. Lastly, we discuss the accuracy of numerical solutions when integrating over health costs. Assuming lognormality, simple approximation rules work well.

Suggested Citation

  • Eric French & John Bailey Jones, 2002. "On the distribution and dynamics of health costs," Working Paper Series WP-02-21, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-02-21
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    2. Aviva Aron-Dine & Liran Einav & Amy Finkelstein & Mark R. Cullen, 2012. "Moral Hazard in Health Insurance: How Important Is Forward Looking Behavior?," NBER Working Papers 17802, National Bureau of Economic Research, Inc.
    3. Rong Hai, 2013. "The Determinants of Rising Inequality in Health Insurance and Wages: An Equilibrium Model of Workers' Compensation and Health Care Policies," PIER Working Paper Archive 13-019, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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    Keywords

    Medical care; Cost of; Retirement;
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