Does morbidity matter? Perceived health status in explaining the share of healthcare expenditures

We argue that the demand for healthcare services can be better explained by individual need based variables rather than by macro variables such as the Gross Domestic Product (GDP) per capita and the share of public healthcare expenditures. This study introduces a self-rated health variable called <italic>morbidity</italic> that describes individual needs for health care -- healthy individuals <italic>need</italic> less health care than sick ones -- and that is measured through personal interviews conducted by the Organization for Economic Co-operation and Development (OECD). In addition, stationary properties of the series are considered in order to understand the effect of shocks to expenditure behaviour on health care. Stationary test results show that we should not only use differenced values for the model variables but also incorporate time-specific effects into the model. Using the appropriate specification and accounting for the time effect, we find evidence supporting the hypothesis that the share of healthcare expenditure in GDP rises with the increased <italic>need</italic> for health care. The <italic>need</italic> for health care is also found to be more important than per capita GDP when explaining the change in the share of healthcare expenditures for the examined countries.