Estimating the drivers and projecting long-term public health expenditure in the European Union: Baumol’s ‘cost disease’ revisited

This study assesses the relative importance of demographic versus non demographic drivers of health expenditure (HE), and makes long term projections for the HE to GDP ratio.

This paper breaks down public HE in its drivers for European Union countries. Baumol's 'unbalanced growth model' suggests that low productivity growth sectors, such as health services, when facing an inelastic demand curve result in a rising expenditure to GDP ratio. Although national income and relative prices of health are found to be important determinants of public HE, significant residual growth persists, inter alia, reflecting the impact of omitted variables, such as technological progress, and policies and institutions. Consequently, in order to obtain sensible long term projections, it is necessary to make (arbitrary) assumptions on the future evolution of a time drift/residuals.