Disentangling the heterogeneous income elasticity and dynamics of health expenditure.

Abstract

In this article, we empirically study the impact of per capita income on health-care expenditure and its dynamics over time in a sample of 14 OECD countries for the period 1971 to 2009. A simple model, built upon one developed by Newhouse (1977), suggests that health care is a necessity in the short run but it cannot be rejected to be a luxury good in the long run. Our findings provide strong empirical evidence that a year’s health expenditure is conditioned by the previous one. Interestingly, our results reveal increasing income inelasticity over time along with huge heterogeneity across countries. Finally, this article supports the hypothesis of conditional convergence in health-care spending among countries. In designing policies which facilitate the sustainability of national health systems, we emphasize that ceteris paribus the greater the participation of public health, the lower the growth rate of health spending. High share of children and elderly over working age population opposite influences. We also provide evidence that technological progress could reduce the long-run income elasticity for health care, which in turn threaten the sustainability of health-care systems.