Who Drives up the Ratio of Health Expenditure to GDP Most? -- A Theoretical Model

Presenter: Li Zhang, Oslo University

Abstract

Health expenditure (HE) as a share of GDP has risen fast in developed countries in the last few decades. The studies about HE-GDP ratio can be classified into two categories. One category answers the normative question ‘Is the higher HE-GDP ratio good or bad’; the other answers the positive question ‘What factors affect the HE-GDP ratio’, or, if possible, ‘How is the HE-GDP ratio composed’.

The existing sparse theoretical works mostly belong to the first category. This paper gives a try to answer the second category of questions. After giving an expression of the HE-GDP ratio which takes price, income growth, technology advance, and demographical factor as explanatory variables, it further explores the most influential factors of the ratio.

The analysis focuses on how the share of treated patients is changed, the complicated part of the HE-GDP expression. The key of the analysis is that patients evaluate the treatment with a given price and quality under their income and health conditions. Some patients readily get treated because the treatment is cheap and effective to them, but it is not to some others so they do not get treated. The treated share is calculated by locating marginal consumers who are indifferent between get treated or not.

The model shows that income growth will make patients who before did not have enough income to get treated become new marginal consumers, therefore enlarge the treated patient share. Technology advance is defined as lower quality-adjusted-price. It has similar effect as income growth does since the new treatment with the new adjusted price is worthy to be bought to more patients.

However, technology’s more important role functions through increasing quality. In particular, by making medical treatments safer and less painful, technology advance lets patients who were too sick to get treated and whose symptoms are mild also get treated. This role is especially important in rich societies, because the reason why some patients do not get treated in rich societies mostly is not money consideration, but the existing treatment is not safe and effective enough to them. Income growth has smaller and smaller effect on HE in rich societies. Its effect can even be negative as to the HE-GDP ratio. This is consistent with the empirical finding that income elasticity is lower in richer societies but higher in poorer societies.