Is the Health Care Price Inflation in US Urban Areas Stationary? Evidence from Panel Unit Root Tests

Purpose – This study aims to investigate, for the first time in the literature, the stochastic properties of the US aggregate health-care price inflation rate series, using the data on health-care inflation rates for a panel of 17 major US urban areas for the period 1966-2006.Design/methodology/approach – This goal is undertaken by applying the first- and second generation panel unit root tests and the panel stationary test developed recently by Carrion-i Silvestre et al. (2005) that allows for endogenously determined multiple structural breaks and is flexible enough to control for the presence of cross-sectional dependence.Findings – The empirical findings indicate that after controlling for the presence of cross-sectional dependence, finite sample bias, and asymptotic normality, the US aggregate health-care price inflation rate series can be characterized as a non-stationary process and not as a regime-wise stationary innovation process.Research limitations/implications – The research findings apply to understanding of health-care sector price escalation in US urban areas. These findings have timely implications for the understanding of the data structure and, therefore, constructs of economic models of urban health care price inflation rates. The results confirming the presence of a unit root indicating a high degree of inflationary persistence in the health sector suggests need for further studies on health-care inflation rate persistence using the alternative measures of persistence. This study's conclusions do not apply to non-urban areas.Practical implications – The mean and variance of US urban health-care inflation rate are not constant. Therefore, insurers and policy rate setters need good understanding of the interplay of the various factors driving the explosive health-care insurance rates over the large US metropolitan landscape. The study findings have implications for health-care insurance premium rate setting, health-care inflation econometric modeling and forecasting.Social implications – Payers (private and public employers) of health-care insurance rates in US urban areas should evaluate the value of benefits received in relation to the skyrocketing rise of health-care insurance premiums.Originality/value – This is the first empirical research focusing on the shape of urban health-care inflation rates in the USA