The Risk and Duration of Catastrophic Health Care Expenditures

Daniel Feenberg, Jonathan Skinner

NBER Working Paper No. 4147
Issued in August 1992
NBER Program(s):   AG   HE   PE

Catastrophic medical expenses are an important economic risk facing the elderly. Little is known about the persistence of such out-of-pocket medical costs. We measure the time-series property of medical costs using information on medical deductions from a panel of tax returns. During the period of analysis, 1968-73, taxpayers could deduct medical expenses above 3 percent of income. We correct for the resulting censoring bias using multivariate Tobit estimated with a variant of the smoothed simulated maximum likelihood (SSML) method. The data suggest that the burden of out-of-pocket medical expenses is substantially larger for lower income families. Furthermore, the estimated coefficients suggest substantial time-persistence in out-of-pocket medical care costs; a $1 increase in out-of-pocket medical spending is predicted to increase future spending by an additional $2.80. These results may shed light both on the social value of catastrophic health insurance as well on aggregate saving behavior.

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Document Object Identifier (DOI): 10.3386/w4147

Published: The Review of Economics and Statistics, 76(4), Nov. 1994, pp. 633-647 citation courtesy of

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