Population ageing and its implications on aggregate health care demand: empirical evidence from 22 OECD countries

Recent evidence indicates that the relationship between age and health care expenditure is not as straightforward as it appears. In fact, micro-level studies find that time to death, rather than ageing, is possibly the main driver of the escalating health care costs in developed countries. Unfortunately, the evidence at the macro level is less clear and often depends on the specification of the empirical model used. We use an aggregate demand framework to assess whether health expenditure is more likely to be driven by ageing per se or proximity to death. Using panel data from 22 OECD countries from the first half of the 1990s, we find population ageing to be negatively correlated with health expenditure once proximity to death is accounted for. This suggests that the effects of ageing on health expenditure growth might be overstated while the effects of the high costs of medical care at the end of life are potentially underestimated. With respect to the latter, our finding highlights the importance of long-term and hospice care management. An expanded long-term care program may not only improve patient welfare, but also reduce costs of care by reducing the duration of hospital care for terminally ill patients. If expensive medical treatment for patients near the end of life can be controlled for, health expenditure growth resulting from population ageing is unlikely to present a most serious problem.