Pathways and hidden benefits of healthcare spending growth in the U.S.

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After a brief reprieve, healthcare spending in the United States is expected to once again rise rapidly, continuing the trend of the past half-century. To inform the debate about whether policymakers should take action to contain high and rising medical care costs, we use panel data on all 50 states for the period 1993 to 2009 to estimate a healthcare spending model. Our framework, which includes a structural spending equation and a health production function, identifies the pathways through which medical technology and income affect healthcare costs and the potential health benefits they produce. We find evidence that medical technology and income are important factors fueling rising healthcare costs in the United States. However, our results also indicate they generate large health benefits in the form of lower mortality that may outweigh the costs and increase social economic welfare.