Competing Demographic Drivers of Hospital Expenditures: Coexistence of the Red Herring and the Steepening Effects

Abstract

The fiscal sustainability of healthcare systems is increasingly strained by aging populations with two competing hypotheses dominating the literature. The Red Herring Hypothesis suggests that healthcare expenditures are driven more by proximity to death than by chronological age, while the Steepening Hypothesis examines whether expenditures increase faster for older individuals over time. Nevertheless, these two frameworks have traditionally been studied independently rather than in conjunction. This paper offers a unified econometric model, allowing for a rigorous assessment of their concurrent validity and interaction. Using comprehensive register-based monthly somatic hospital expenditure data for the entire Danish population from 2002 to 2017, we provide robust evidence that both Red Herring and Steepening effects operate simultaneously. Although Red Herring effects modestly mitigate the expenditure burden of an increasingly older population, they are substantially outweighed by pronounced Steepening effects, which account for nearly 60% of hospital expenditure growth during the observation period. Through a novel decomposition method, we identify a previously unrecognized interaction between these phenomena, a Red Herring Steepening effect, which accelerates expenditure growth in the final years of life for older individuals. Our findings suggest that healthcare systems face considerably greater fiscal challenges from population aging than previously recognized under the Red Herring Hypothesis alone.