Friday, September 30, 2016

the link between healthcare expenditure and national income?

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At a cross-country level, the strongest predictor of healthcare spending is national income (you can find more about measures of national income in our entry on GDP data). The following visualization presents evidence of this relationship. The correlation is striking: countries with a higher per capita income are much more likely to spend a larger share of their income on healthcare. In a seminal paper, Newhouse (1977)8 showed that aggregate income explains almost all of the variance in the level of healthcare expenditure (specifically, Newhouse (1977) showed that among a group of 13 developed countries, GDP per capita explained 92 percent of the variance in per capita health expenditure). Other studies have confirmed that this strong positive relationship remains after accounting for additional factors, such as country-specific demographic characteristics.9 Although in strict sense this result cannot be interpreted causally – since countries differ in many unobservable aspects that relate both to income and healthcare spending –, more sophisticated econometric models dealing with the issue of ‘omitted variables’ seem to confirm that the effect of per capita GDP on expenditure is clearly positive and significant (for a technical discussion of this conclusion see Culyer and Newhouse (2000)).10

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