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Does the U.S. health care sector suffer from Baumol's cost disease? Evidence from the 50 states


  • Bates, Laurie J.
  • Santerre, Rexford E.


This study examines if health care costs in the United States are affected by Baumol's cost disease. It relies on an empirical test proposed by Hartwig (2008) and extended by Colombier (2010) and uses a panel data set of 50 states over the 1980–2009 period. The results suggest that health care costs grow more rapidly when economy-wide wage increases exceed productivity gains. The findings are fairly robust with respect to time- and state-fixed effects, individual state time trends, and two-stage least square estimation. Consequently, this study suggests that the U.S. health care sector suffers from Baumol's cost disease.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jhecon:v:32:y:2013:i:2:p:386-391
    DOI: 10.1016/j.jhealeco.2012.12.003

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    References listed on IDEAS

    1. Hartwig, Jochen, 2008. "What drives health care expenditure?--Baumol's model of 'unbalanced growth' revisited," Journal of Health Economics, Elsevier, vol. 27(3), pages 603-623, May.
    2. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
    3. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
    4. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    5. Davis, Morris A. & Heathcote, Jonathan, 2007. "The price and quantity of residential land in the United States," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2595-2620, November.
    6. Nordhaus William D, 2008. "Baumol's Diseases: A Macroeconomic Perspective," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-39, February.
    7. Gerdtham, Ulf-G. & Jonsson, Bengt, 2000. "International comparisons of health expenditure: Theory, data and econometric analysis," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 1, pages 11-53 Elsevier.
    8. Jack E. Triplett & Barry P. Bosworth, 2003. "Productivity measurement issues in services industries: "Baumol's disease" has been cured," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 23-33.
    9. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
    10. 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.
    11. Jochen Hartwig, 2011. "Can Baumol's model of unbalanced growth contribute to explaining the secular rise in health care expenditure? An alternative test," Applied Economics, Taylor & Francis Journals, vol. 43(2), pages 173-184.
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    Cited by:

    1. Bradley Rossen & Akhter Faroque, 2016. "Diagnosing the Causes of Rising Health-Care Expenditure in Canada: Does Baumol's Cost Disease Loom Large?," American Journal of Health Economics, MIT Press, vol. 2(2), pages 184-212, Spring.
    2. Maik T. Schneider & Ralph Winkler, 2010. "Growth and Welfare under Endogenous Lifetime," Diskussionsschriften dp1013, Universitaet Bern, Departement Volkswirtschaft.
    3. Andersen, Torben M & Kreiner, Claus Thustrup, 2013. "Baumol’s cost disease and the sustainability of the welfare state," CEPR Discussion Papers 9772, C.E.P.R. Discussion Papers.
    4. Jochen Hartwig & Jan-Egbert Sturm, 2012. "An outlier-robust extreme bounds analysis of the determinants of health-care expenditure growth," KOF Working papers 12-307, KOF Swiss Economic Institute, ETH Zurich.
    5. Torben M. Andersen, 2015. "The Nordic welfare model and welfare services - Can we maintain acceptable standards?," Economics Working Papers 2015-02, Department of Economics and Business Economics, Aarhus University.
    6. Siciliani Luigi, 2013. "The Economics of Long-Term Care," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 14(2), pages 343-375, August.
    7. Manabu Nose, 2015. "Estimation of Drivers of Public Education Expenditure; Baumol’s Effect Revisited," IMF Working Papers 15/178, International Monetary Fund.
    8. repec:eee:trapol:v:61:y:2018:i:c:p:10-16 is not listed on IDEAS
    9. Akinwande A. Atanda & Andrea K. Menclova & W. Robert Reed, 2016. "Is Health Care Infected by Baumol’s Cost Disease? Test of a New Model," Working Papers in Economics 16/33, University of Canterbury, Department of Economics and Finance.
    10. repec:kap:itaxpf:v:24:y:2017:i:3:d:10.1007_s10797-016-9410-7 is not listed on IDEAS
    11. repec:bla:econom:v:84:y:2017:i:335:p:417-429 is not listed on IDEAS
    12. Akinwande A. Atanda & Andrea K. Menclova & W. Robert Reed, 2016. "Is Health Care Infected by Baumol’s Cost Disease? Test of a New Model Using an OECD Dataset," Working Papers in Economics 16/04, University of Canterbury, Department of Economics and Finance.
    13. Chen, Xin & Moul, Charles C., 2014. "Disease or utopia? Testing Baumol in education," Economics Letters, Elsevier, vol. 122(2), pages 220-223.
    14. John Buckell & Andrew Smith & Roberta Longo & David Holland, 2013. "Health inefficiency and unobservable heterogeneity - empirical evidence from pathology services in the UK National Health Service," Working Papers 1307, Academic Unit of Health Economics, Leeds Institute of Health Sciences, University of Leeds.
    15. Jochen Hartwig & Jan-Egbert Sturm, 2014. "Robust determinants of health care expenditure growth," Applied Economics, Taylor & Francis Journals, vol. 46(36), pages 4455-4474, December.

    More about this item


    Health care costs; Baumol cost disease; Unbalanced growth; Service sector; Aggregate productivity;

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General


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