Drivers of Health‐Care Expenditure: What Role Does Baumol's Cost Disease Play?1. (22nd February 2017)

• Record Type: Journal Article
• Authors: Colombier, Carsten
• Is Part Of: Social science quarterly. Volume 98:Number 5(2017)
• Page Start: 1603
• Page End: 1621
• Publication Date: 2017-02-22
• Subjects: Political science -- Periodicals; Social sciences -- Periodicals; 300
• DOI: 10.1111/ssqu.12384
• Languages: English
• ISSNs: 0038-4941

Abstract

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.