In this article it is investigated the convergence of health care expenditures per capita in OECD during the 1970–2005 period by applying Lima and Resende (2007) persistence methodology. Departures across countries were evaluated in terms of panel data unit root tests advanced by Im et al. (2003). The evidence illustrated that one cannot reject the null hypothesis of unit root for the (log) of the ratio of health care expenditures of each country relative to a reference unit except average of per capita health expenditures The results, therefore, favour a very strong form of persistence for OECD expenditures inequality.

Aslan, Alper

English

Research Papers in Economics

1 
 
Autobiographical Note 
 
Alper ASLAN 
University of Erciyes,Faculty of Economics and Administrative Sciences, Department of Economics, 
Kayseri, Turkey. alperaslan@erciyes.edu.tr 
 
 
 
Convergence of per capita health care expenditures in OECD Countries 
 
 
ABSTRACT 
In this article it is investigated the convergence of health care expenditures  per capita in 
OECD  during  the  1970–2005  period  by  applying  Lima  and  Resende  (2007)  persistence 
methodology. Departures across countries were evaluated in terms of panel data unit root tests 
advanced  by  Im  et  al.  (2003).  The  evidence  illustrated  that  one  cannot  reject  the  null 
hypothesis of unit root for the (log) of the ratio of health care expenditures of each country  
relative  to  a  reference  unit  except  average  of  per  capita  health  expenditures  The  results, 
therefore, favour a very strong form of persistence for OECD expenditures inequality.  
 
I. Introduction 
 
The analysis of the convergence of the GDP structure and its components dynamics has been 
widening in recent years within identifiable regions of the world or between developing and 
developed  countries.  Borrowing  the  concept  of  economic  convergence  from  neoclassical 
growth theory, a group of health economists have recently considered convergence of health 
care expenditure between the OECD countries or between the EU member countries (Hitiris, 
1997; Nixon, 1999; Hitiris and Nixon, 2001; Hofmarcher et al., 2004; Okunade et al., 2004, 
Narayan 2007 and Wang 2008).  
 2 
 
The argument is that as income tends to converge between countries, the income-dependent 
health  expenditure  should  also  follow  similar  paths.  Other  important  factors  that  drive 
convergence in health expenditure include integration in health care markets and common 
policies to promote health and living and working conditions, and to coordinate medical and 
health research (Wang, 2008).  
 
 
This paper reports on the application of adapted methods within this discipline to the area of 
health care expenditure in Organization for Economic Cooperation and Development (OECD) 
countries  in  order  to  determine  if  differences  in  health  care  expenditures  (HCE)  are 
diminishing over time.  
 
Health care expenditure, which in most developed countries was rising sharply for more than 
three decades, has recently come under pressure for cost containment and budgetary control. 
The  provision  of  health  care  services  now  constitutes  one  of  the  largest  industries  in  the 
OECD countries (Anderson et al., 2000). 
 
A central issue in the convergence literature is the assessment of the speed of convergence 
among  regional  units  and,  therefore,  any  additional  formal  testing  strategies  for  the 
persistence HCE inequality might constitute a relevant endeavour.  Recent methodological 
advances in terms of unit root testing for panels (see e.g. Levin and Lin, 1992, 1993, Im et al., 
2003) allow examining persistence phenomena even for short time periods.  
 
One of the most important issues in the unit root literature since the work of Nelson and 
Plosser (1982) is the implications of the presence of unit roots for macroeconomic theory and 
policy. The argument used by Nelson and Plosser (1982) is that most of the fluctuations in 
output should be attributable to changes in the trend component, in a trend versus cyclical 
decomposition, which would presumably be unaffected by monetary factors. In other words, 
the existence of unit roots leads to the inference that movements in output are persistent. 
Since the  cyclical component is assumed to be stationary, it  follows that fluctuations  are 
mostly associated with the secular component. 
 3 
 
Examples of applications of aforementioned unit root tests include Fleissig and Strauss (2000, 
2001)  that  respectively  deal  with  purchasing  power  parity  and  per  capita  gross  domestic 
product (GDP) in OECD countries. In a similar paper, Resende (2004) that tests Gibrat’s law 
for cities in Brazil; Resende and Lima (2005) for assessing market share instability in the 
Brazilian industry. In addition Lima and  Resende (2007) investigated the convergence of real 
gross domestic product (GDP) per capita at the state level in Brazil during the 1985–1999 
periods. 
 
On the other hand, there are not sufficient papers that test whether or not per capita HCE 
converges each other’s. Nixon (2000) and Hitiris and Nixon (2001), analysed the convergence 
in health (and healthcare expenditure) among the countries of the European Union before the 
latest expansion (EU-15), using as indicators the life expectancy of men and women, and 
Infant Mortality. Their results point to a statistically significant convergence in the period 
1960–1995 for sigma (σ) convergence and of beta (β) convergence for the period 1980–1995.  
 
In  a  different  method,  Narayan  (2007)  examined  that  whether  or  not  per  capita  health 
expenditures of OECD countries converge to the per capita health expenditures of the USA 
over  the  period  1960–2000.  And  found  that  while  univariate  and  panel  tests  that  do  not 
incorporate structural breaks fail to find evidence of convergence, univariate and panel LM 
tests that allow for structural breaks find strong evidence of convergence of per capita health 
expenditures  of  the  UK,  Canada,  Japan,  Switzerland,  and  Spain  to  that  of  the  USA.  By 
examining  the  degree  of  convergence  in  per  capita  health  care  expenditure  and  its 
components, Wang (2008) investigated the issue across the US states from 1980 to 2004. The 
major finding is the moderate evidence of convergence in total health care expenditure and 
the diverse performance of the expenditure components regarding convergence. 
 
In the present study, it is investigated the magnitude of inequality persistence by means of a 
panel data unit root test devised for heterogeneous panels and applied in the most recent of the 
aforementioned studies, but mostly in other contexts. 
 
The paper is organized as follows. Section II provides basic background on panel data unit 
root testing. Section III describes the data construction procedures and presents the empirical 
results. Section IV brings some final comments. 4 
 
 
II. Panel Data Unit Roots 
 
It  is  well  known  that  traditional  unit  root  tests  possess  low  power  against  near  unit  root 
alternatives  (Diebold  and  Nerlove,  1990).  The  development  of  panel  data  unit  root  tests 
addresses  this  aspect  and  additionally  allows  considering  data  sets  with  a  short  time 
dimension.  Early  treatments  appear  in  Quah  (1994).  The  most  disseminated  results  were 
developed by Levin and Lin (1992, 1993) and Im, Pesaran and Shin (2003) and surveys on the 
topic appear in Banerjee (1999) and Maddala and Wu (1999). 
 
Im  et  al.  (2003),  provide  a  panel  data  unit  root  test  that  considers  unit-specific  slope 
coefficients and, therefore, relaxes a restrictive assumption of the tests advanced by Levin and 
Lin (1992, 1993). Considering the model  given in expression but with parameter varying 
across units as given below: 
 
             i=1,……,N, t=1,…….,T                                        (1) 
 
IPS propose test where H0: βi=0 and H1: βi<0  The simplest test proposed by IPS, the so called 
t-bar statistic is defined as the average of the individual Dickey–Fuller (DF) or augmented 
Dickey–Fuller (ADF), say t-bar statistics 
                           
 where                                                                       (2) 
Where                                                  (3) 
 
The means   and variances   were obtained by IPS by means of 
Monte Carlo simulations. 
III. Empirical Analysis 
The empirical analysis are based on 19 OECD countries, namely Austria, Belgium, Canada, 
Denmark, Finland, Germany, Iceland, Ireland, Japan, Luxemburg, Netherland, New Zealand, 
Norway, Portugal, Spain, Sweden, Switzerland, UK and USA. This sample of countries is 
dictated by data availability. Time series data at 2000 GDP Price level are annual and for the 5 
 
period 1970–2005. All data are obtained from the OECD health database 2005, and were 
converted into natural logarithmic form before the empirical analysis. 
 
In this section, they are presented in Table 1and Table 2 the empirical results for the panel 
data unit root tests for the log of the referred ratio of per capita HCE and log of the gaps from 
the USA for OECD countries.  
 
Table 1. Panel data unit root tests HCE  (1970–2005) 
Augmenting lag  Test statistic 
P=1  0.587 (0,721) 
P=2  0,982(0,837) 
P=3  1,256 (0,895) 
Automatic Selection   
MSIC  -0,298 (0,388) 
MAIC  0,056 (0,522) 
Note: p-values appear in parentheses 
 
It is considered a strong form of inequality persistence as the non-rejection of the unit root 
hypothesis would indicate that the gap among the different states and gaps from the USA 
would be infinitely persistent in OECD countries.  
 
It  is  well  known  that  both  per  capita  health  expenditures  and  health  expenditures  as  a 
proportion of GDP are the highest for the USA compared to any other country. In this light, 
an important issue that remained unresolved in the health economics literature was whether 
per capita health expenditures of other countries converged to that of the USA. In order to 
examine  whether  per  capita  health  expenditures  for  OECD  countries  would  indicate 
persistence that of the USA, Lima and Resende (2007) persistence methodology is applied 
 
 
Table 2. Panel data unit root tests (HCEi,t  /HCEUSA,t) (1970–2005) 
Augmenting lag  Test statistic 
P=1  0.977 (0,835) 6 
 
P=2  1,478 (0,930) 
P=3  0,750 (0,773) 
Automatic Selection   
MSIC  1,281 (0,899) 
MAIC  1,344 (0,916) 
Note: p-values appear in parentheses 
 
In contrast, Table 1 and Table 2, test based on average of per capita health expenditures 
would illustrate that the gap among OECD countries would not be persistence.  
 
Table 3. Panel data unit root tests (HCEi,t  /HCEaverage,t) (1970–2005) 
Augmenting lag  Test statistic 
P=1  -3.326 (0,00) 
P=2  -1,635(0,005) 
P=3  -0,720 (0,235) 
Automatic Selection   
MSIC  -2,93 (0,001) 
MAIC  -2,77 (0,002) 
          Note: p-values appear in parentheses 
 
The  estimations  employed  in  this  study  made  use  of  the  software  E-views  6.0  and  the 
corresponding results for the IPS test are reported in Table 1-3. 
 
First, it is considered different lag possibilities and the evidence indicated that one cannot 
reject the null hypothesis of unit root except Table 3. In order to be more confident on the lag 
choice,  it  can  be  relied  on  the  procedure  suggested  by  Holmes  (2002)  that  built  on  the 
criterion advanced by Said and Dickey (1984) in the context of the IPS test. The referred 
criterion would establish ( which in the present case would favour a lag between 2 
and 3. 
 
The issue of choosing the lag has been the subject for considerable discussion in the literature 
( Lopez et al., 2005). It is followed the approach suggested by Ng and Perron (2001). They  7 
 
show that the use of modified criteria yields unit root tests with better size as well as power 
even in smaller samples, and that the modified criteria are superior to other selection criteria 
such as Ng and Perron (1995) as the latter may lead to over parameterisation with subsequent 
loss of power. Therefore, it is considered an automatic lag choice procedure that allows for 
different lag horizons in different states and is based on the Modified Schwarz Information 
Criterion (MSIC) and Modified Akaike Information Criterion (MAIC) as readily implemented 
in the aforementioned software.   
 
In that case, once more the evidence favours the non-rejection of the null hypothesis except 
average  convergence.  Altogether,  the  evidence  is  consistent  with  a  very  strong  form  of 
persistence for per capita HCE as the gaps across OECD countries does not seem to fade 
away in the long run.  
 
However, as it occurs with traditional time series unit root tests, one should be concerned with 
the ability of capturing near unit root behaviours. In any case, the evidence supports a very 
high degree of inequality persistence. 
 
IV. Final Comments 
 
In this article it is aimed at providing formal tests for the degree of inequality persistence of 
real per health care expenditures for 19 OECD countries. The issue of health expenditure 
convergence  has  attracted  substantial  attention  in  the  empirical  literature.  The  evidence 
indicated  highly  persistent  inequality  patterns  but  formal  testing  of  the  magnitude  of  the 
phenomenon was absent. In that sense, this article has undertaken panel data unit root tests 
that indicated a very strong form of persistence associated with null hypothesis of unit root. 
 
 
 
 
 
 
 
 8 
 
 
 
 
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Do Health Expenditures ‘Catch-up’? Evidence From

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Health expenditure in the EU: convergence by enlargement?

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Market share instability in Brazilian industry: a dynamic panel data analysis,

Panel data unit roots and cointegration: an overview.

Panel unit root tests of OECD stochastic convergence,

Panel unit root tests of purchasing power parity for price indeces,

State of the Art Unit Root Tests and Purchasing Power Parity,

Testing for unit roots in heterogeneous panels,

The Convergence of Health care Expenditures

Trends and random walks in macroeconomic time series: some evidence and implications,

Unit root tests in ARMA models with data dependent methods for the selection of the truncation lag.

Unit root tests in panel data: asymptotic and finite-sample properties,

Unit root tests in panel data: new results,

Unit roots in economic time series: a selected survey.

Convergence of per capita health care expenditures in OECD Countries

Convergence of per capita health care expenditures in OECD Countries

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