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Drivers of Healthcare Expenditure: What Role does Baumol's Cost Disease Play?

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  • Carsten Colombier

Abstract

Objectives We devise an instrument to test for Baumol's cost disease in healthcare. Baumol's cost disease is a price effect that is assumed to be a major determinant of the secular rise in health†care expenditure (HCE). Methods This price effect is notoriously difficult to estimate as the construction of medical price indices is flawed. However, our instrument—the adjusted Baumol variable—avoids this problem as we do not rely on medical price indices. We apply this instrument to a panel data set of 20 OECD countries ranging from 1970 to 2010. Results Baumol's cost disease partly affects healthcare. We estimate that the cost disease exerts from 15 to 40 percent of its potential full effect on HCE. Conclusions Policymakers have more leeway to curb ever†increasing HCE than is suggested by the literature. Our instrument is also well suited to investigate other possibly affected sectors such as the government or education.

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  • Carsten Colombier, 2017. "Drivers of Healthcare Expenditure: What Role does Baumol's Cost Disease Play?," Social Science Quarterly, Southwestern Social Science Association, vol. 98(5), pages 1603-1621, November.
    • Handle: RePEc:bla:socsci:v:98:y:2017:i:5:p:1603-1621
    DOI: 10.1111/ssqu.12384
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    Cited by:

    1. Hartwig, Jochen, 2020. "Not Evidence for Baumol’s Cost Disease. A Reply to Atanda and Reed (International Journal for Re-Views in Empirical Economics, 2020)," International Journal for Re-Views in Empirical Economics (IREE), ZBW - Leibniz Information Centre for Economics, vol. 4(2020-3), pages 1-4.
    2. Mehdi Barati & Hadiseh Fariditavana, 2020. "Asymmetric effect of income on the US healthcare expenditure: evidence from the nonlinear autoregressive distributed lag (ARDL) approach," Empirical Economics, Springer, vol. 58(4), pages 1979-2008, April.
    3. Colombier, Carsten & Braendle, Thomas, 2022. "Healthcare expenditure projections up to 2050: ageing and the COVID-19 crisis," MPRA Paper 120659, University Library of Munich, Germany.
    4. Michael Stucki, 2021. "Factors related to the change in Swiss inpatient costs by disease: a 6-factor decomposition," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 22(2), pages 195-221, March.
    5. Carsten Colombier & Thomas Braendle, 2018. "Healthcare expenditure and fiscal sustainability: evidence from Switzerland," Public Sector Economics, Institute of Public Finance, vol. 42(3), pages 279-301.

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