Disability Forecasts and Future Medicare Costs

Dana Goldman, RAND
Jay Bhattacharya, RAND
Geoffrey Joyce, RAND
Darius N. Lakdawalla, RAND
Baoping Shang, RAND

This paper projects how changes in disability among the next generation of elderly will affect future Medicare spending. The model uses a large, representative sample of Medicare beneficiaries aged 65 and older to simulate remaining health status and death. Doing so actually requires two steps: estimating transition models into all possible health and disability states conditional on demographics and current health, and then forecasting health transitions based on the estimated probabilities. The sample is rejuvenated by bringing in a new cohort of 65 year-olds each year. The model is used to simulate future costs under a variety of scenarios. Our preferred scenario uses trends from the National Health Interview Survey, with the surprising result that the young are becoming increasingly disabled even as the old have become healthier. Medicare expenditures will grow faster than others predict, mainly because previous models fail to account for the divergent trends.