Health expenditure and income in the United States

This paper investigates the long-run economic relationship between health care expenditure and income in the US at a State level. Using a panel of 49 US States over the period 1980-2004, we study the non-stationarity and co-integration between health spending and income, ultimately measuring income elasticity of health care. The tests we adopt allow us to explicitly control for cross-section dependence and unobserved heterogeneity. Specifically, in our regression equations we assume that the error has a multifactor structure, which may capture global shocks and local spill overs in health expenditure. Our results suggest that health care is a necessity rather than a luxury, with an elasticity much smaller than that estimated in other US studies. Further, we detect significant spatial concentration in US health spending. Our broad perspective of cross-section dependence as well as the methods used to capture it give new insights on the debate over the relationship between health spending and income. Copyright © 2009 John Wiley & Sons, Ltd.