IDEAS home Printed from https://ideas.repec.org/p/kof/wpskof/06-133.html
   My bibliography  Save this paper

What Drives Health Care Expenditure? Baumol's Model of "Unbalanced Growth" Revisited

Author

Listed:
  • Jochen Hartwig

Abstract

The share of health care expenditure in GDP rises rapidly in virtually all OECD countries, causing increasing concern among politicians and the general public. Yet, economists have to date failed to reach an agreement on what the main determinants of this development are. This paper revisits Baumol's (1967) model of 'unbalanced growth', showing that the latter offers a ready explanation for the observed inexorable rise in health care expenditure. The main implication of Baumol's model in this context is that health care expenditure is driven by wage increases in excess of productivity growth. This hypothesis is tested empirically using data from a panel of 19 OECD countries. Our tests yield robust evidence in favor of Baumol's theory.

Suggested Citation

  • Jochen Hartwig, 2006. "What Drives Health Care Expenditure? Baumol's Model of "Unbalanced Growth" Revisited," KOF Working papers 06-133, KOF Swiss Economic Institute, ETH Zurich.
    • Handle: RePEc:kof:wpskof:06-133
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.3929/ethz-a-005187505
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Baumol, William J, 1972. "Macroeconomics of Unbalanced Growth: Reply," American Economic Review, American Economic Association, vol. 62(1), pages 150-150, March.
    2. Hansen, Paul & King, Alan, 1998. "Health care expenditure and GDP: panel data unit root test results--comment," Journal of Health Economics, Elsevier, vol. 17(3), pages 377-381, June.
    3. McCoskey, Suzanne K. & Selden, Thomas M., 1998. "Health care expenditures and GDP: panel data unit root test results," Journal of Health Economics, Elsevier, vol. 17(3), pages 369-376, June.
    4. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
    5. Gunnar Eliasson & Magnus Henrekson, 2004. "William J. Baumol: An Entrepreneurial Economist on the Economics of Entrepreneurship," Small Business Economics, Springer, vol. 23(1), pages 1-7, August.
    6. Nadim Ahmad & François Lequiller & Pascal Marianna & Dirk Pilat & Paul Schreyer & Anita Wölfl, 2003. "Comparing Labour Productivity Growth in the OECD Area: The Role of Measurement," OECD Science, Technology and Industry Working Papers 2003/14, OECD Publishing.
    7. Gerdtham, Ulf-G. & Lothgren, Mickael, 2000. "On stationarity and cointegration of international health expenditure and GDP," Journal of Health Economics, Elsevier, vol. 19(4), pages 461-475, July.
    8. George Karatzas, 2000. "On the determination of the US aggregate health care expenditure," Applied Economics, Taylor & Francis Journals, vol. 32(9), pages 1085-1099.
    9. Kander, Astrid, 2005. "Baumol's disease and dematerialization of the economy," Ecological Economics, Elsevier, vol. 55(1), pages 119-130, October.
    10. Peter Zweifel & Stefan Felder & Andreas Werblow, 2004. "Population Ageing and Health Care Expenditure: New Evidence on the "Red Herring"," The Geneva Papers on Risk and Insurance, The International Association for the Study of Insurance Economics, vol. 29(4), pages 652-666, October.
    11. Parkin, David & McGuire, Alistair & Yule, Brian, 1987. "Aggregate health care expenditures and national income : Is health care a luxury good?," Journal of Health Economics, Elsevier, vol. 6(2), pages 109-127, June.
    12. Ulf‐G. Gerdtham, 1992. "Pooling international health care expenditure data," Health Economics, John Wiley & Sons, Ltd., vol. 1(4), pages 217-231, December.
    13. Wagstaff, Adam, 1986. "The demand for health : Some new empirical evidence," Journal of Health Economics, Elsevier, vol. 5(3), pages 195-233, September.
    14. Mark V. Pauly, 2003. "Market Insurance, Public Insurance and the Rate of Technical Change in Medical Care," The Geneva Papers on Risk and Insurance, The International Association for the Study of Insurance Economics, vol. 28, pages 180-193, April.
    15. Joseph P. Newhouse, 1977. "Medical-Care Expenditure: A Cross-National Survey," Journal of Human Resources, University of Wisconsin Press, vol. 12(1), pages 115-125.
    16. Hitiris, Theo & Posnett, John, 1992. "The determinants and effects of health expenditure in developed countries," Journal of Health Economics, Elsevier, vol. 11(2), pages 173-181, August.
    17. Peter Zweifel & Stefan Felder & Markus Meiers, 1999. "Ageing of population and health care expenditure: a red herring?," Health Economics, John Wiley & Sons, Ltd., vol. 8(6), pages 485-496.
    18. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    19. Gerdtham, Ulf-G. & Jonsson, Bengt, 1991. "Conversion factor instability in international comparisons of health care expenditure," Journal of Health Economics, Elsevier, vol. 10(2), pages 227-234, July.
    20. Helmut Herwartz & Bernd Theilen, 2003. "The determinants of health care expenditure: testing pooling restrictions in small samples," Health Economics, John Wiley & Sons, Ltd., vol. 12(2), pages 113-124.
    21. Getzen, Thomas E., 2000. "Health care is an individual necessity and a national luxury: applying multilevel decision models to the analysis of health care expenditures," Journal of Health Economics, Elsevier, vol. 19(2), pages 259-270, March.
    22. Newhouse, Joseph P., 1987. "Cross national differences in health spending what do they mean?," Journal of Health Economics, Elsevier, vol. 6(2), pages 159-162, June.
    23. Gerdtham, Ulf-G. & Jonsson, Bengt, 1994. "Health care expenditure in the Nordic countries," Health Policy, Elsevier, vol. 26(3), pages 207-220, January.
    24. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 631-652, Special I.
    25. Hansen, Paul & King, Alan, 1996. "The determinants of health care expenditure: A cointegration approach," Journal of Health Economics, Elsevier, vol. 15(1), pages 127-137, February.
    26. 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.
    27. Albert Okunade & Mustafa Karakus, 2001. "Unit root and cointegration tests: timeseries versus panel estimates for international health expenditure models," Applied Economics, Taylor & Francis Journals, vol. 33(9), pages 1131-1137.
    28. Tony Culyer, 1989. "Cost-containment in Europe," Working Papers 062chedp, Centre for Health Economics, University of York.
    29. Nancy Devlin & Paul Hansen, 2001. "Health care spending and economic output: Granger causality," Applied Economics Letters, Taylor & Francis Journals, vol. 8(8), pages 561-564.
    30. Michael Grossman, 1972. "The Demand for Health: A Theoretical and Empirical Investigation," NBER Books, National Bureau of Economic Research, Inc, number gros72-1.
    31. Meena Seshamani & Alastair Gray, 2004. "Ageing and health-care expenditure: the red herring argument revisited," Health Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 303-314.
    32. Choi, In, 2001. "Unit root tests for panel data," Journal of International Money and Finance, Elsevier, vol. 20(2), pages 249-272, April.
    33. Pedro Pita Barros, 1998. "The black box of health care expenditure growth determinants," Health Economics, John Wiley & Sons, Ltd., vol. 7(6), pages 533-544.
    34. Henning Ahnert & Geoff Kenny, 2004. "Quality adjustment of European price statistics and the role for hedonics," Occasional Paper Series 15, European Central Bank.
    35. Carrion-i-Silvestre, Josep Lluis, 2005. "Health care expenditure and GDP: Are they broken stationary?," Journal of Health Economics, Elsevier, vol. 24(5), pages 839-854, September.
    36. Seshamani, Meena & Gray, Alastair M., 2004. "A longitudinal study of the effects of age and time to death on hospital costs," Journal of Health Economics, Elsevier, vol. 23(2), pages 217-235, March.
    37. Gerdtham, Ulf-G. & Sogaard, Jes & Andersson, Fredrik & Jonsson, Bengt, 1992. "An econometric analysis of health care expenditure: A cross-section study of the OECD countries," Journal of Health Economics, Elsevier, vol. 11(1), pages 63-84, May.
    38. Jochen Hartwig, 2005. "Sind unsere gesamtwirtschaftlichen Probleme ueberhaupt loesbar?," KOF Working papers 05-112, KOF Swiss Economic Institute, ETH Zurich.
    39. Donald Freeman, 2003. "Is health care a necessity or a luxury? Pooled estimates of income elasticity from US state-level data," Applied Economics, Taylor & Francis Journals, vol. 35(5), pages 495-502.
    40. Baumol, William J, 1993. "Health Care, Education and the Cost Disease: A Looming Crisis for Public Choice," Public Choice, Springer, vol. 77(1), pages 17-28, September.
    41. Jennifer Roberts, 1999. "Sensitivity of elasticity estimates for OECD health care spending: analysis of a dynamic heterogeneous data field," Health Economics, John Wiley & Sons, Ltd., vol. 8(5), pages 459-472.
    42. Blomqvist, A. G. & Carter, R. A. L., 1997. "Is health care really a luxury?," Journal of Health Economics, Elsevier, vol. 16(2), pages 207-229, April.
    43. Jewell, Todd & Lee, Junsoo & Tieslau, Margie & Strazicich, Mark C., 2003. "Stationarity of health expenditures and GDP: evidence from panel unit root tests with heterogeneous structural breaks," Journal of Health Economics, Elsevier, vol. 22(2), pages 313-323, March.
    44. Anita Wölfl, 2003. "Productivity Growth in Service Industries: An Assessment of Recent Patterns and the Role of Measurement," OECD Science, Technology and Industry Working Papers 2003/7, OECD Publishing.
    45. Breusch, Trevor S & Wickens, Michael R., 1987. "Dynamic Specification, the Long Run and the Estimation of Transformed Regression Models," CEPR Discussion Papers 154, C.E.P.R. Discussion Papers.
    46. Berndt, Ernst R. & Cutler, David M. & Frank, Richard G. & Griliches, Zvi & Newhouse, Joseph P. & Triplett, Jack E., 2000. "Medical care prices and output," Handbook of Health Economics,in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 3, pages 119-180 Elsevier.
    47. Di Matteo, Livio & Di Matteo, Rosanna, 1998. "Evidence on the determinants of Canadian provincial government health expenditures: 1965-1991," Journal of Health Economics, Elsevier, vol. 17(2), pages 211-228, April.
    48. Joseph P. Newhouse, 2001. "Medical Care Price Indices: Problems and Opportunities / The Chung-Hua Lectures," NBER Working Papers 8168, National Bureau of Economic Research, Inc.
    49. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    50. Mark V Pauly, 2003. "Market Insurance, Public Insurance and the Rate of Technical Change in Medical Care," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 28(2), pages 180-193, April.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Rising health care expenditure; 'Unbalanced growth'; OECD panel JEL classifications;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • I10 - Health, Education, and Welfare - - Health - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kof:wpskof:06-133. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/koethch.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.