On the Distribution and Dynamics of Health Care Costs
Using data from the Health and Retirement Survey and the Assets and Health Dynamics
of the Oldest Old survey, this paper presents estimates of the stochastic process
that determines both the distribution and dynamics of health care costs. We find that
the data generating process for log health costs is well represented as the sum of a white
noise process and a highly persistent AR(1) process. We also find that the innovations
to this process can be modelled with a normal distribution that has been adjusted to
capture the risk of catastrophic health care costs. Simulating this model, we find that in
any given year, 0.1% of households receive a health cost shock with a present value of at
least $125,000.
