Health care expenditure inertia in the OECD countries: A heterogeneous analysis

Health care expenditure studies of the Organization for Economic Cooperation and Development (OECD) countries remain important because their findings often suggest cost containment and other policy initiatives. This paper focuses on the compatibility of OECD health data with the “expenditure inertia” (or lagged adjustments) hypothesis, by modeling individual country time‐series data of 21 nations for the 1960–1993 period. Maximum likelihood estimates of the Box–Cox transformation regression models reveal that: (a) the hypothesized impact of health “expenditure inertia” is both pervasive and strong, averaging 0.64 across the countries; (b) the real GDP elasticities of health care expenditures vary widely among the countries and average 0.34 in the short run – implying that health care is a necessity; (c) the long run GDP elasticities are less than 1 in 8 countries, unitary elastic in 8 countries and elastic in 5 countries – suggesting that health care is not universally a necessity or a luxury commodity for the OECD countries; (d) physician‐inducement effects (dis‐inducement in a few countries) are weak, with a mean elasticity estimate of 0.17; and (e) no unique functional form approximation model is globally compatible with the data across the countries. Health care cost containment policy implications of these findings are explored.