Is the health care price inflation in US urban areas stationary?

Vasudeva Murthy,Albert Okunade

doi:10.1108/jefas-02-2017-0043

Abstract

PurposeThis 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/approachThis 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.FindingsThe 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/implicationsThe 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 implicationsThe 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 implicationsPayers (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/valueThis is the first empirical research focusing on the shape of urban health-care inflation rates in the USA.

Highlights

Applied economists are increasingly interested in studying the relationship between inflation and other economic variables (Thanh, 2015; Nguyen, 2015)
For decades, economists have been testing whether the inflation rate series are stationary at the regional or national level in developed countries and in varying panels of the Organization for Economic Cooperation and Development (OECD) countries (Rose, 1988; Johansen, 1992; Culver and Papell, 1997; Ericsson et al, 1998; Crowder and Wohar, 1999; Lee and, 2001; Rapach, 2002; Holmes, 2002; Charmeza et al, 2005; Basher and Westerlund, 2006; Lee and Chang, 2007; Romero-Ávila and Usabiaga, 2009a, 2009b)
Murthy and Okunade (2016), Okunade and Murthy (2002) and Bodenheimer (2005), among others, had alluded to the role and nature of technological change in the rise of US health-care costs and the price inflation. As to fill this void, for the first time in the health economics literature, our current study, by utilizing the annual aggregate health-care inflation rate and the panel data of health-care inflation rate data from 17 major US urban areas for the period 1966-2006, applies a battery of the univariate, first- and second-generation panel unit root tests, the panel Lagrange multiplier (LM) unit root test that allows for two structural breaks recently developed by Im et al (2005) and the recent panel unit root test of Carrion-i-Silvestre et al (2005) that allows for endogenously determined multiple structural breaks experienced by individual members of the panel and is flexible enough to control for the presence of cross-sectional dependence (CD)

Summary

Introduction

Applied economists are increasingly interested in studying the relationship between inflation and other economic variables (Thanh, 2015; Nguyen, 2015). This requires stationarity of the time-series data of the variables, in levels or when differenced, to avoid spurious regression parameter estimates. The presence of a unit root in the inflation rate series and the attendant problem of persistence are of significance for policy effectiveness, inflation rate forecasting and the underlying theoretical models – see Levin and Piger (2004), O’Reilly and Whelan (2004) and Corvoisier and Mojon (2005). If the aggregate inflation rate is non-stationary, I (1), and highly persistent, monetary policy actions aimed at containing the inflation rate will be futile and result in a permanent effect

Objectives

Results

Conclusion