Abstract
SummaryWe propose a panel data model for nonstationary variables with interactive fixed effects and coefficients that may vary over time and use it to examine time variation in the income elasticity of health expenditures in the OECD and the Eurozone. Our empirical analysis shows that the income elasticity of healthcare expenditure slightly increased in the OECD and the Eurozone during 1995–2004 but remained below one. This finding suggests that healthcare is not a luxury good in these countries.
Highlights
The income elasticity of healthcare expenditure is defined as the percentage change in healthcare expenditure in response to the percentage change in income per capita
There is a steady increase of average healthcare expenditure per capita during the past two decades in the OECD and Eurozone, and the rate of increase falls slightly after the Global Financial Crisis
The estimates of the coefficient of lgdp from Model (3.1) and Model (3.2) are over 1 for both the OECD and Eurozone, which is in concordance with earlier studies like Newhouse (1977), Leu (1986), and Gerdtham et al (1992)
Summary
The income elasticity of healthcare expenditure is defined as the percentage change in healthcare expenditure in response to the percentage change in income per capita. If this elasticity is greater than one, healthcare expenditure grows faster than income, as luxury goods do, and is driven by market forces alone (Culyer, 1988). Significant governmental funding of health systems produces elasticities lower than one, typical of necessary goods. On this subject, there is growing literature on modelling and assessing the sustainability of health systems in some countries (e.g., Di Matteo and Di Matteo, 1998; Hartwig, 2008).
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