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Baumol's Cost Disease in Acute vs. Long-term Care - Do the Differences Loom Large?

Kaan Celebi, Jochen Hartwig and Anna Pauliina Sandqvist
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Anna Pauliina Sandqvist: Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich

No 62, Chemnitz Economic Papers from Department of Economics, Chemnitz University of Technology

Abstract: Baumol's (1967) model of ‘unbalanced growth’ yields a supply-side explanation for the ‘cost explosion’ in health care. Applying a testing strategy suggested by Hartwig (2008), a sprawling literature affirms that the ‘Baumol effect’ has both a statistically and economically significant impact on health care expenditure growth. Skeptics maintain, however, that the proliferation of hi-tech medicine in acute care is clearly at odds with the assumption underlying Baumol's model that productivity-enhancing machinery and equipment is only installed in the ‘progressive’ (i.e. manufacturing) sector of the economy. They argue that Baumol's cost disease may affect long-term care, but not acute care. Our aim in this paper is to test whether Baumol's cost disease affects long-term care and acute care differently. Our testing strategy consists in combining Extreme Bounds Analysis (EBA) with an outlier-robust MM estimator. Using panel data for 23 OECD countries, our results provide robust and statistically significant evidence that expenditures on both acute care and long-term care are driven by Baumol's cost disease, even though the effect on long-term care expenditures is more pronounced.

Keywords: Health care expenditure; Baumol's cost disease; Extreme Bounds Analysis; MM estimator; OECD panel (search for similar items in EconPapers)
JEL-codes: C12 C23 I10 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2024-02
New Economics Papers: this item is included in nep-age, nep-eff and nep-hea
References: View references in EconPapers View complete reference list from CitEc

Published in Chemnitz Economic Papers, February 2024, pages 1-27

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