Determinants of Health Care Expenditures : An Overview of International Comparisons and a Panel Data Analysis

Rationale: Health care expenditures in industrial countries have been growing rapidly over the past forty years. This rapid growth jeopardizes the sustainability of public budgets. A particular concern for the next decades is the effect of aging of the population on health care expenditures. Objectives: The first purpose of this research project is to provide an up to date overview of the literature on international comparisons of health care expenditures. This gives an insight in the most important variables to be used in estimating and projecting health care expenditures. Furthermore, this project aims to contribute to the existing literature by investigating the determinants of health care expenditures making use of panel data analysis. Herewith, the main focus is on the relative price of health care. The relative price of health care tends to increase over time because of the Baumol effect. Omitting the relative price in the set of explanatory variables may lead to biased coefficients for the other variables. Methodology: The literature overview serves as a starting point for determining the explanatory variables. In addition to the standard variables, we include the relative price as a possible determinant of health care expenditure. The main data source is the OECD Health Data set 2005, from which available data of the EU-15 countries are used for the period 1970-2003. Series for relative prices of health care for all countries were constructed out of series of wages and a consumer price index. We estimated several fixed effects models and performed unit root and cointegration tests. Results and Conclusions: We find that income and the share of the population aged 65-74 are important drivers of health care expenditures, which is consistent with the main findings of the recent literature. In addition, the share of the population aged above 75 and the time trend turn out to be insignificant. With respect to the relative price of health care, the results indicate that it has a negative but insignificant effect on the volume of health care when considering the period 1970-2003. In the period 1980-2003, however, the relative price of health care has a significant negative effect on the volume of health care. The estimated price elasticity of approximately -0.75 implies that a higher relative price is associated with a decrease in volume but still an increase in real health care expenditures. The significant effect of the relative price on volume over the period 1980-2003 seems to be consistent with the strong cost containment policy in many countries during this period