“The Lifetime Costs of Bad Health” by Ponpoje Porapakkarm
National Graduate Institute for Policy Studies
How costly is it to be unhealthy? And what makes good health valuable? In this paper, we investigate the pathways through which health affects lifecycle outcomes. We focus on the high school males group to remove the educational effect. Our studies distinguish between instantaneous and accumulated effects of bad health: the latter effect depends on the length of sickness which can be substantial when unhealthy status is highly persistent. To capture the long duration-dependence of unhealthy status we start by estimating a health shock process that allows for state-dependence and fixed heterogeneity. Our estimated process can well capture various dynamic moments of health status as in the data (PSID/HRS). Next, we feed this health shock process into a rich structural life-cycle model. The estimated model is consistent with two important sets of empirical facts: i) the quantitative impact of bad health on earnings, medical spending, labor supply and life expectancy; ii) the large disparity in accumulated wealth over lifecycle between the healthy and the unhealthy. We show that the monetary cost of bad health steeply increases with the number of years individuals spend being unhealthy over their working life. The largest component of these costs is due to the productivity loss while the contribution of out-of-pocket medical spending is relatively small. To account for non-monetary effects of health, we evaluate the willingness to pay for one percentage point increase in probability to be healthy. Our decomposition exercise shows that the most valuable aspect of being healthy is the longer life expectancy.