The determinants of health care expenditure: testing pooling restrictions in small samples

Health care expenditure has increased substantially in all Western industrialized countries in the last decades. The necessity to contain the increase in health care expenditure has motivated the analysis of its determinants to explain differences across countries and health systems. However, recent studies have questioned the use of cross section data arguing that health systems are too different to allow for such comparisons. In this paper we investigate whether this criticism is really justified. We analyze the variations of health care expenditure in OECD countries relative to income, population aging and technological change. Our analysis is based on pooled cross section data and time series. Firstly, formulating error correction models for individual countries we demonstrate that in almost all cases the investigated variables are cointegrated. Secondly, we use a bootstrap framework for inference and examine whether the influence of explanatory variables is unique across countries. Applying recursive estimation procedures we find evidence for cross country homogeneity during the period 1961-1979. In the last two decades health care dynamics become more and more country specific thus indicating divergence of health systems and the growing importance of country-specific effects in the explanation of differences in health care expenditure.