Is pharmaceutical expenditure related to the business cycles?

ABSTRACT Recent research is focused on the study of health care expenditure and fiscal sustainability. In order to facilitate the understanding of this issue, we centre our interest on the Spanish pharmaceutical expenditure. Specifically, using data for the period 1995–2012, in the article we analyse if economic cycles affect pharmaceutical expenditures. Our results support that there is a positive relationship between pharmaceutical expenditure and economic development. Therefore, we conclude that pharmaceutical expenditures are pro cyclical over the last years.


I. Introduction
Rising trends of health expenditure during the past two decades and its link with health outcomes and Gross Domestic Product (GDP) has concerned policymakers (Worm, 2012). In Spain, as in other countries, health spending in general and pharmaceutical one in particular, have been a significant policy issue in health reform. This topic has received much research attention in several papers (Moreno-Torres et al., 2011;Kumar, 2013;Shi et al., 2014). However, new data available allow us to deep in the knowledge of these time trends.
Along total health care expenditure, the pharmaceutical one accounts for around a 20% (OECD Health Statistics, 2014 The remainder of the paper is structured as follows. Section 2 provides a brief description of the data and an overview of the model specification. Section 3 presents the empirical results. The final section concludes.

II. Data and empirical framework
This study uses the OECD Health Statistics 1 (2014), the main and largest available source of information to compare developed health care systems (Blázquez-Fernández et al., 2013). Data set covers total per capita pharmaceutical health care expenditure (tpe) in Spain and its desegregation in public (pupe) and private (prpe) of Spain between 1995 and 2012 2 . Furthermore, data on per capita GDP is also used. Table 1 shows an overview of our key variables.
[Insert Table 1. Here] Figure 1 plots the annual time trends of Total Pharmaceutical Expenditure (TPE), Total Health Expenditure (THE) and GDP. In this sense, we find that TPE and THE show a similar evolution as GDP. That is, an increase until the economic crisis period. However, TPE growth is lower than the one for THE. To describe the time trends of this issues, the annual TPE as a share of the THE was examined in Figure 2.
Besides, to describe its growth in the contextual economic environment, the relationship between TPE, and THE, and GDP are also included. We can note that TPE/GDP is almost stable, whereas THE/GDP present a slightly increase. Regarding TPE/THE, it indicates a decrease during the study period. Moreover, Figure 3 presents the time trend of TPE and its desegregation by financing agent (public or private). It can be appreciated a similar evolution between these variables (all of them expressed in per capita $US PPP), while private expenditure has much lower levels. In order to estimate the cyclical sensibility of pharmaceutical health care expenditure, we follow Cleeren et al. (2015) in order to derive cyclical movement elasticities. In particular, we use the Hodrick-Prescott (HP) filter (1997) which decomposes time series in a trend and a cyclical component. We apply this to both series 3 , tpe and gdp. So, the basic empirical specification to be analysed is given by the following model: 2 In order to ensure a complete time-series we disregarded the observations available prior 1995. 3 Also, they were log-transformed before using the filter.
Furthermore, to analyse the long-term consequences of the cyclical sensibility, we specified the following Equation: That is, through this Equation (2) we could analyse if the growth rate of our dependent variable is amplified when a decline occurs (contraction). So, the contraction is a dummy variable that takes 1 when the economy is contracting ( ∆ ≤ 0) and 0 otherwise (Lamey et al., 2012).

III. Results
Regarding how sensible are TPE to business cycles, the sign of the elasticity estimated through Equation (1) indicates that pharmaceutical expenditures behave pro cyclically and move in the same direction as the economy and business cycles. As for, if the cyclical sensibility have long-term permanent consequences, That is, in this country, total pharmaceutical expenditures would increase during expansions and decrease during economic contractions. However, it is also shown that this cyclical sensibility does not have long-term permanent consequences.
For a policy economic perspective, this paper encourages some debates about the sustainability of national health care systems. In addition, it points out some consequences that public policies may have. So, control escalation of pharmaceutical expenditure is a key for a successful health system reform and to ensure access to medicines for all the patients. Nevertheless, as pharmaceutical costs continue rising drug design should be based on a value-based approach instead of a cost-management one.