Aggregate Health Care Expenditures and National Income. Is Health Care a Luxury Good?

It is well known that a strong relationship exists between national expenditures on health care and national income. This has been used to suggest that health care is a luxury good, and that factors such as the type of health care delivery system in a country are of little importance in determining expenditure levels. This paper argues that these implications rely upon the application of microeconomic analysis to macroeconomic data, and that this is not appropriate. As well as raising questions about the inferences drawn from previous studies, new empirical evidence is presented which casts some doubts on previous findings. International comparisons are based on Purchasing Power Parity rather than exchange rate conversions, underlining the importance of prices as well as quantities in the relationship, and leading to the conclusion that the aggregate data show health care to be, if anything, a necessity rather than a luxury good.