The Income Elasticity of Health Care Spending. A Comparison of Parametric and Nonparametric Approaches

Parametric and nonparametric estimation techniques are compared in estimating the relationship between income and health expenditures with implications for the reliability of past estimates of health expenditure income elasticity. Relative to a more flexible nonparametric approach, a parametric approach can generate over or underestimates in health expenditure. Three time series cross-section data sets are used: (a) United States state level data from 1980-1997, (b) Canadian province level data from 1965-2000, and (c) national level data for 16 OECD countries from 1960-1997. Relative to ordinary least squares, locally weighted scatterplot smoothing allows for variability in the income elasticity of health spending as income varies. Generally, results of the latter suggest that income elasticities are higher at low-income levels and lower at higher income levels. As well, these results confirm that income elasticity does vary by level of analysis with international income elasticities being generally larger than national or regional studies.