Determinants of health expenditure in OECD countries and the income elasticity

Abstract

After Newhouse's seminal paper published in 1977 the determinants of health expenditure has been studied both by academia and policymakers. The main result of these studies is that income is the most important factor explaining the health expenditure. This thesis aims to reveal the non-income determinants of health expenditure, the magnitude of the income elasticity of health expenditure in OECD countries and to explore whether health expenditure is more elastic in high income countries. Health can be seen as a necessity if the income elasticity is below unity and as a luxury good if the income elasticity is above unity. An interpretation of health being a luxury good is that health expenditure would increase at a higher rate than GDP and the public health sector have high priority among the goals of economic and social development. Panel data on GDP per capita, dependency rate and the public share in health expenditure have been used to investigate the determinants of total health expenditure per capita of OECD countries for the period 1975-2006. For a richer analysis linear and log-linear functional forms are employed. Linear functional form reveals that 100 US$ increase in GDP per capita raises health expenditure per capita by 10.99 US$. Log-linear functional form yields income elasticity much higher than unity. After sorting out the OECD countries as highincome and low-income, it is found that health is more elastic in high-income countries.