Excess healthcare costs of psychological distress in young women: Evidence from linked national Medicare claims data

The prevalence of mental health disorders in young adults is increasing, yet there is limited empirical evidence on its economic consequences. We contribute to the literature by estimating the healthcare costs of psychological distress using panel data of young women (aged 18–23 years with a 5‐year follow‐up) from the Australian Longitudinal Study on Women's Health and linked administrative data from Medicare Australia. Our empirical strategy is based on the classical two‐part model of healthcare costs with individual specific fixed‐effects. We complement our analysis with a test for selection on unobservables to address potential concerns of endogeneity. We find that young women with psychological distress have 15% higher annual healthcare costs (excluding hospital costs) than women with no psychological distress. A large proportion of these costs is driven by the use of antidepressants and the services of psychiatrists and psychologists. We further find that women with psychological distress have higher out‐of‐pocket costs on these mental health related services compared to non‐mental health specific services. Additionally, we show that the effect of psychological distress on healthcare costs is highest during the first 6 months of onset, which gradually decreases afterwards. The findings justify the importance of policy initiatives towards early prevention and treatment of psychological distress, especially among young women.