The determinants of health expenditures: evidence from US state-level data

Abstract

Most macro studies of what determines health expenditures have used the same panel of OECD country-level data. Based on a more homogeneous panel data set of US states we constructed, this note applies the model selection procedure to identify the determinants of health expenditures at the state level. We find that the four key factors are gross state products, the proportion of the population over the age of 65, the degree of urbanization and the number of hospital beds. The cross-section income elasticity of health care is around 0.7, implying that health care is a necessity rather than a luxury good at the state level. The (relative) price of health care varies significantly across states but does not appear to have real effects on the amount of resources (measured in real dollars) a state devotes to health care.