Health Investment over the Life-Cycle

We quantify what drives the rise in medical expenditures over the life- cycle. Three motives are considered. First, health delivers a flow of utility each period (the consumption motive). Second, better health enables people to allocate more time to productive or pleasurable activities (the investment motive). Third, better health improves survival prospects (the survival mo- tive). We calibrate an overlapping generations model with endogenous health accumulation to match key economic targets and then we gauge its perfor- mance by comparing key age-pro?les from the model to their counterparts in the data. We ?nd that the investment motive is more important than the consumption motive until about age 50. After that, the rise in medical ex- penditures is primarily driven by the value of health as a consumption good. The survival motive is quantitatively less important when compared to the other two motives. Finally, with our calibrated model, we conduct a series of counter-factual experiments to investigate how modi?cations to social security, government-run health insurance, and longevity impact the life-cycle behavior of medical expenditures as well as the aggregate medical expenditures-GDP ratio.