Drivers of health care expenditure: Does Baumol's cost disease loom large?
AbstractAccording to Baumol (1993) health care epitomises Baumol's cost disease. Sectors that suffer from Baumol's cost disease are characterised by slow productivity growth due to a high labour coefficient. As a result, unit costs of these sectors rise inexorably if the respective wages increase with productivity growth of the progressive industries such as manufacturing. Thus, according to Baumol (1993) the secular rise in health-care expenditure has been unavoidable. This present paper demonstrates that health care is contracted by Baumol's cost disease, but only to a minor extent. Consequently, policy-makers have more leeway to curbever-increasing health-care expenditure than is suggested by Baumol (1993) and other authors. In addition, we test the implications of Baumol's cost disease for health care by avoiding the well-known flaws in constructing medical price indices. Therefore, the adjusted Baumol variable derived in this paper is also extremely appropriate to test the validity of Baumol's cost diseases of other service industries such as education or the live performing arts. Additionally, our analysis suggests that health care is rather a necessity than a luxury at the national level, which conflicts with macroeconomic evidence provided in the relevant literature. --
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Bibliographic InfoPaper provided by University of Cologne, FiFo Institute for Public Economics in its series FiFo Discussion Papers - Finanzwissenschaftliche Diskussionsbeiträge with number 12-5.
Date of creation: 2012
Date of revision:
health-care expenditure; Baumol's cost disease; the macroeconomics of health care; the adjusted Baumol variable;
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
- I10 - Health, Education, and Welfare - - Health - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-07 (All new papers)
- NEP-EFF-2013-01-07 (Efficiency & Productivity)
- NEP-HEA-2013-01-07 (Health Economics)
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