Is the health care price inflation in US urban areas stationary?

Vasudeva Murthy and Albert Okunade

Journal of Economics, Finance and Administrative Science, 2018, vol. 23, issue 44, 77-94

Abstract: Purpose - This study aims to investigate, for the first time in the literature, the stochastic properties of the US aggregate health-care price inflation rate series, using the data on health-care inflation rates for a panel of 17 major US urban areas for the period 1966-2006. Design/methodology/approach - This goal is undertaken by applying the first- and second-generation panel unit root tests and the panel stationary test developed recently byCarrion-i-Silvestreet al.(2005)that allows for endogenously determined multiple structural breaks and is flexible enough to control for the presence of cross-sectional dependence. Findings - The empirical findings indicate that after controlling for the presence of cross-sectional dependence, finite sample bias, and asymptotic normality, the US aggregate health-care price inflation rate series can be characterized as a non-stationary process and not as a regime-wise stationary innovation process. Research limitations/implications - The research findings apply to understanding of health-care sector price escalation in US urban areas. These findings have timely implications for the understanding of the data structure and, therefore, constructs of economic models of urban health-care price inflation rates. The results confirming the presence of a unit root indicating a high degree of inflationary persistence in the health sector suggests need for further studies on health-care inflation rate persistence using the alternative measures of persistence. This study’s conclusions do not apply to non-urban areas. Practical implications - The mean and variance of US urban health-care inflation rate are not constant. Therefore, insurers and policy rate setters need good understanding of the interplay of the various factors driving the explosive health-care insurance rates over the large US metropolitan landscape. The study findings have implications for health-care insurance premium rate setting, health-care inflation econometric modeling and forecasting. Social implications - Payers (private and public employers) of health-care insurance rates in US urban areas should evaluate the value of benefits received in relation to the skyrocketing rise of health-care insurance premiums. Originality/value - This is the first empirical research focusing on the shape of urban health-care inflation rates in the USA.

Keywords: Cross-sectional dependence; Health-care price inflation rate; Multiple structural breaks; Panel unit root tests; C32; E31; I1 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jefasp:jefas-02-2017-0043

DOI: 10.1108/JEFAS-02-2017-0043

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