Using data from 17,438 elderly Medicare beneficiaries, we estimated the relationship between variations in medical spending and health outcomes. We used instrumental variable estimation to identify the relationships between spending over 3 years and health status at the end of the period. We found a positive and statistically significant relationship between medical spending and improved health, measured in both the probability of survival and an index incorporating overall health status and activity limitations. Our findings imply that across-the-board reductions in Medicare spending may result in poorer health for some beneficiaries, and that more careful identification of unnecessary spending is important.
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