Rising health spending, new medical technology and the Baumol effect

Marc Pomp and Suncica Vujic

CPB Discussion Papers from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: Health expenditure as a share of GDP rises in most OECD countries. One of the possible causes is the so-called Baumol effect, which may arise if labour productivity in health care grows more slowly than in the overall economy. If in addition demand for health care is inelastic, then the share of health spending in GDP will rise over time. This paper estimates the Baumol effect in health spending, using a panel data set of OECD countries. We do indeed find that one percentage growth in economy-wide labour productivity is associated with about 0.5 percent growth in real health spending. This implies that economy-wide productivity growth leads to higher real health spending.

Keywords: Baumol effect; health spending; panel data (search for similar items in EconPapers)
JEL-codes: H51 I11 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hea
Date: 2008-12
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Persistent link: http://EconPapers.repec.org/RePEc:cpb:discus:115

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