Is Health Care a Necessity or a Luxury? New Evidence from a Panel of U.S. State-Level Data

This paper estimates the income elasticity of health care expenditures using annual data on health spending by state in the U.S. from 1966-2009. Panel stationarity tests incorporating structural breaks in the levels and trends in Health Care Expenditures and Disposable Personal Income yield inconsistent results, with stationarity rejected for HCE but not for DPI. Regression results using levels estimation robust to orders of integration differed considerably depending on time period, and the cross-state variation in elasticity estimates was quite large. Results of the first difference models provide more consistent estimates across time periods, whether expressed as averages of individual state estimates or as pooled time series. Income elasticities for the full sample fall in the range 0.21-0.22, below that of recent research.