THE RISK AND DURATION OF CATASTROPHIC HEALTH-CARE EXPENDITURES

We measure the time-series property of catastrophic medical costs facing the elderly using information on medical deductions from a panel of tax returns. During the period of analysis, 1968-73, taxpayers could deduct medical expenses above 3% of income. We correct for the resulting censoring bias using multivariate tobit estimated with a variant of the smoothed simulated maximum likelihood (SSML) method. The estimated coefficients imply a $1 increase in out-of-pocket medical spending is associated with $2.65 in future out-of-pocket spending.