Equilibrium Health Spending and Population Aging in a Model of Endogenous Growth: Will the GDP Share of Health Spending Keep Rising?

Existing forecasts of a continuously rising income share of health spending (SHS) take per capita income growth and population aging as given. We develop a human capital-based endogenous growth model treating these variables as endogenously determined. In this private-economy setting, SHS has equilibrium upper bounds due to rising shadow prices of life and health protection. Our calibrated simulations reproduce observed trends in fertility and life expectancy and account for advances in life protection and health maintenance technologies. The model identifies the major forces driving the dynamic path of SHS and uncovers a direct link between health investment at young age and the equilibrium rate of economic growth.