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Can Baumol's model of unbalanced growth contribute to explaining the secular rise in health care expenditure? An alternative test

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  • Jochen Hartwig

Abstract

In a recent paper, I argued that Baumol's model of 'unbalanced growth' offers a ready explanation for the observed secular rise in Health Care Expenditure (HCE) in rich countries. Baumol's model implies that HCE is driven by wage increases in excess of productivity growth. I tested this hypothesis empirically, using data from a panel of 19 Organization for Economic Cooperation and Development (OECD) countries and found robust evidence in favour of Baumol's theory. An alternative way to test Baumol's theory is to check whether its implication that variations in the relative price of medical care contribute significantly to explaining variations in health expenditure in the same direction has an empirical grounding. Earlier studies, although mostly not in an explicit attempt to test Baumol's theory, have occasionally rejected this hypothesis. Despite poor data quality of the available medical price indices, I perform the alternative test using data for nine OECD countries. My findings suggest that the relative price of medical care is in fact a statistically significant explanatory variable for health expenditure, thus lending support to Baumol's theory.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 43 (2011)
Issue (Month): 2 ()
Pages: 173-184

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Handle: RePEc:taf:applec:v:43:y:2011:i:2:p:173-184

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Cited by:
  1. Colombier, Carsten, 2012. "Drivers of health care expenditure: Does Baumol's cost disease loom large?," FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge 12-5, University of Cologne, FiFo Institute for Public Economics.
  2. Bates, Laurie J. & Santerre, Rexford E., 2013. "Does the U.S. health care sector suffer from Baumol's cost disease? Evidence from the 50 states," Journal of Health Economics, Elsevier, vol. 32(2), pages 386-391.
  3. Potrafke, Niklas, 2010. "The growth of public health expenditures in OECD countries: do government ideology and electoral motives matter?," MPRA Paper 24083, University Library of Munich, Germany.
  4. Chen, Xin & Moul, Charles C., 2014. "Disease or utopia? Testing Baumol in education," Economics Letters, Elsevier, vol. 122(2), pages 220-223.
  5. Bates, Laurie & Santerre, Rexford, 2013. "Is the U.S. Private Education Sector Infected by Baumol’s Cost Disease? Evidence from the 50 States," MPRA Paper 52300, University Library of Munich, Germany.

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