Population Ageing and Health Care Expenditure: New Evidence on the "Red Herring"

In health economics applications involving outcomes (y) and covariates (x), it is often the case that the central inferential problems of interest involve E[y/x] and its associated partial effects or elasticities. Many such outcomes have two fundamental statistical properties: y > or = 0; and the outcome y = 0 is observed with sufficient frequency that the zeros cannot be ignored econometrically. This paper (1) describes circumstances where the standard two-part model with homoskedastic retransformation will fail to provide consistent inferences about important policy parameters; and (2) demonstrates some alternative approaches that are likely to prove helpful in applications.

Increased attention is being paid to the amount and types of medical services rendered in the period before death. There is a popular impression that a greater share of resources is being devoted to dying patients than in the past. We examined trends in the proportion of Medicare expenditures for persons 65 years old or older in their last year of life to determine whether there were any changes from 1976 to 1988. Using Medicare program data for 1976, 1980, 1985, and 1988, we classified Medicare payments according to whether they were made for people in their last year of life (decedents) or for survivors. We also assigned expenses for care in the last year of life according to intervals of 30 days before the person's death and examined trends according to age. Reflecting the large overall increase in Medicare spending, Medicare costs for decedents rose from $3,488 per person-year in 1976 to $13,316 in 1988. However, Medicare payments for decedents as a percentage of the total Medicare budget changed little, fluctuating between 27.2 and 30.6 percent during the study period. Payments for care during the last 60 days of life expressed as a percentage of payments for the last year also held steady at about 52 percent. Furthermore, the pattern of lower payments for older as compared with younger decedents also prevailed throughout the study period. The same forces that have acted to increase overall Medicare expenditures have affected care for both decedents and survivors. There is no evidence that persons in the last year of life account for a larger share of Medicare expenditures than in earlier years.