AbstractAlthough medical and long‐term care expenditures for older adults are closely related, providing rigorous statistical analysis for their dynamic relationship is challenging. In this research, we propose a novel approach using the panel vector autoregression model to reveal the realized patterns of the interdependence. As an empirical application, we analyze monthly panel data on individuals in a city of Japan, where social insurance covers many formal services for long‐term care. Our estimation results indicate the existence of intertemporal transition from expensive acute medical care to reasonable at‐home medical care, then to at‐home long‐term care. Under this context, the enhancement of formal long‐term care sector in Japan might have played an important role in the suppression of the total care cost in spite for its rapid aging over the past 2 decades. Additionally, we find that daycare plays multiple roles in Japanese long‐term care, such as respite and rehabilitation, but there is no considerable transition from outpatient rehabilitation to daycare in the long‐term care sector.