It is a truism that demographic change will have major effects on the medical sector. Older people spend more on medical care than younger people, and the population will become increasingly aged over time. The share of the population over age 65, for example, is expected to nearly double by 2050, and the share of the population over age 85 is expected to more than triple. Even making the unrealistic assumption that medical costs increase at the rate of GDP, the increased age of the population alone will cause Medicare spending to nearly double as a share of the economy by 2050 and government nursing home spending to triple.

But a moment's thought demonstrates the difficulties with these conclusions. Clearly, medical spending rises with age. But why? Partly, the reason is that disability rises with age, and people who are disabled use more medical resources than people who are not disabled. If we are interested in understanding how demographic change will affect medical spending, therefore, we need to forecast the rate of disability in the economy. The simple projection described above assumed disability rates were constant by age, but substantial recent evidence (see Manton et al., 1997, and references cited therein) suggests that disability rates have been falling over time and are likely to continue falling in the future. Certainly, people are living longer than they used to, and thus fewer people at any one time will be in the position of requiring high-tech, high-cost end-of-life care.