Structural Transformation Towards Healthcare

This paper studies variation in healthcare expenditures across time and space using a model of structural transformation tailored to the healthcare sector. It addresses a key tension: cross-country and time-series data show the health spending share rising with overall consumption, suggesting an aggregate income elasticity above one, yet within countries health spending is flat across household incomes, and quasi-experimental spending responses to oil-driven income shocks rise less than one-for-one with income. The calibrated model reconciles this tension in two ways: First, health spending is equalized across incomes by the government or insurers. Second, with anown-priceelasticity greater than one in absolute value, positive shocks outside healthcare such as oil income shocks generate price effects that drive the health share down. I find that rising incomes are indeed the dominant driver of healthcare spending, and that reforms that raise the productivity of the healthcare sector will drive its spending share up.