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Population aging and the ballooning cost of nursing homes
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We use data on the price of nursing home private rooms to estimate the effects of aging on long-term care (LTC) prices. We exploit regional variation in the dynamics of elderly population growth rates generated by the demographic composition in the distant past. We estimate a cross-region elasticity of LTC prices to the number of people aged 75 and more of 0.6. We argue that this cross-sectional estimate is robust to the presence of heterogeneous treatment effects and is a lower bound for the national estimate; thus, population aging explains at least 38% of the last decade's real increase in LTC price, and it will increase prices in 18% during the next decade. We study the mechanism behind our results and find evidence that regulation and the organization of industry, not the inelastic supply of nurses, is driving the increase in LTC prices.