An Instrumental Variable Approach to Calculating the Income Elasticity of Demand for Healthcare in Canada

Canadian health care spending as risen as a percent of GDP almost every year since statistics on the subject were collected. Over this time frame Canadian incomes have also risen significantly as well. Determining whether the cause of these increases is a demand-sided problem as a result of increasing incomes is important as it will provide some legitimacy that Canadians are simply spending more on health care because they are richer. Using data from the Canadian Institute of Health Information we examine whether rising health spending is likely being driven by rising incomes. Using an instrumental variable approach with provincial natural resource wealth as an instrument we demonstrate that health spending is a normal good and income is likely not driving the rise in health spending as a percent of GDP. We compare our results to previous Canadian literature. We also break down spending by category to examine what categories of spending will likely be influenced by rising incomes