  We first show (1) the importance of investigating health expenditure process
using the order two Markov chain model, rather than the standard order one
model, which is widely used in the literature. Markov chain of order two is the
minimal framework that is capable of distinguishing those who experience a
certain health expenditure level for the first time from those who have been
experiencing that or other levels for some time. In addition, using the model
we show (2) that the probability of encountering a health shock first de-
creases until around age 10, and then increases with age, particularly, after
age 40, (3) that health shock distributions among different age groups do not
differ until their percentiles reach the median range, but that above the
median the health shock distributions of older age groups gradually start to
first-order dominate those of younger groups, and (4) that the persistency of
health shocks also shows a U-shape in relation to age.
