DECOMPOSING THE DETERMINANTS OF HEALTH CARE EXPENDITURE: THE CASE OF SPAIN Autores: David Cantarero Prieto(*) Universidad de Cantabria Santiago Lago-Peñas REDE, IEB y Universidad de Vigo P. T. N.o 10/09 (*) Corresponding author: Departamento de Economía. Universidad de Cantabria. Avda. Los Castros, s/n. 39005. Santander. Tfno: 942-201625. Fax: 942-201603. E-mail: [email protected] Los autores agradecen los comentarios recibidos de Bruno Ventelou y Juan Oliva. N.B.: Las opiniones expresadas en este trabajo son de la exclusiva responsabilidad de los autores, pudiendo no coincidir con las del Instituto de Estudios Fiscales. Desde el año 1998, la colección de Papeles de Trabajo del Instituto de Estudios Fiscales está disponible en versión electrónica, en la dirección: >http://www.minhac.es/ief/principal.htm. Edita: Instituto de Estudios Fiscales N.I.P.O.: 602-09-006-9 I.S.S.N.: 1578-0252 Depósito Legal: M-23772-2001 INDEX 1. INTRODUCTION 2. THE SPANISH NATIONAL HEALTH SERVICE: A BRIEF DESCRIPTION 3. THE DETERMINANTS OF REGIONAL HEALTH CARE EXPENDITURE: III. A SURVEY 4. ECONOMETRIC SPECIFICATION AND DATA 5. ECONOMETRIC RESULTS 6. CONCLUSIONS REFERENCES SÍNTESIS. Principales implicaciones de política económica — 3 — ABSTRACT In this paper the determinants of health care expenditure per capita in Spanish regions are analyzed. The coexistence of several models concerning the degree of spending power decentralization and financing systems makes Spain a singular case and allows us to draw conclusions relevant for other countries decentralizing their health care systems. Analyzing the Spanish case also serves to show a number of pitfalls affecting econometric estimation of the effects of income and demographic structure on health expenditure. Because the reliability of parameter estimates is a key issue in the literature on the determinants of health expenditure, these potential problems should be taken into account when estimating and interpreting results. JEL classification: I18; I38; H73. Keywords: fiscal federalism; regional health expenditure; regional inequalities. — 5 — Instituto de Estudios Fiscales I. INTRODUCTION In this paper the determinants of per capita health care expenditure in Spanish regions are analyzed. The Spanish case is particularly interesting for studying expenditure determinants because of the diversity within its institutional framework. Three different models of expenditure arrangements coexisted in Spain until 2002. The most common model, applied in ten regions or Autonomous Communities (ACs henceforth), was characterized by centralized administration and financing of health care. The second model, found in five ACs, was instead characterized by decentralized administration and responsibility of expenditure. In these ACs, expenditure was financed through specific grants, which yielded low tax autonomy and, in turn, increased difficulty in allocating additional resources to public health care. The final model only existed in two ACs, in which they enjoyed expenditure autonomy and a high level of tax autonomy. The Spanish case also serves to illustrate the relevance of a number of pitfalls affecting previous empirical works in the field, especially when regional data is used and, as is usually the case, per capita income and demographic structure are included as explicative variables. In fact, research has most often focused on estimating income elasticities and the effect of ageing. Because the reliability of parameter estimates becomes a key issue, a number of caveats should be taken into account when estimating and interpreting results. First, income elasticities should not be estimated using income as the only regressor. The correct interpretation of income elasticity is the percentage change in health expenditure in response to a given percentage change in income, everything else held constant. Health expenditure may grow because of ageing, technological change, and so on. If those factors are positively correlated with income (as they often are) bivariate regressions will produce upwardly biased estimates of income elasticity. Second, regions are not countries. In the case of the latter, public revenues rely on national Gross Domestic Product (GDP). The governmental budget constraint tightly binds revenues and expenditure. In the case of regions, this may not be the case. If the responsibility for health care is not decentralized, regional income may be irrelevant. And the same may be true if fiscal equalization is strong and/or public health expenditure is financed by specific grants from the central government. Let us imagine one country composed of two identical regions, A and B, with the responsibility of managing public health. An asymmetrical regional shock created a difference in GDP growth rates: 4% in region A and 0% in region B (national economic growth is then 2%). With full fiscal equalization, a unitary income elasticity at the country level (a growth rate of public health expenditure of 2%) is compatible with a null correlation between income and health expenditure at the regional level. While growth rates of the former are very different, the growth of the latter is equalized at 2%. In sum, the more the fiscal — 7 — interdependence of regions, the lower the regional income elasticity of public health expenditure. Therefore, the institutional framework matters. Third, if changes in the structure of the population are slow and/or the time span of the sample is short, the within-variation of some population brackets may be very low. This becomes a problem if individual effects are included in the estimates and if those effects are correlated with regressors. In this case, the fixed-effects specification is preferable to random-effects, but then the coefficients of variables with little within-variation are imprecisely estimated. Finally, the correlation between population brackets may also be high, producing multicollinearity if several brackets are simultaneously included into estimates. For instance, the proportion of population aged 0-4 may be negatively correlated to the proportion aged 65 and over; or, the proportion of population aged 65-74 may be positively correlated to that aged 75 and over. In the European Union, several studies have examined those effects (Hitiris, 1997; Hitiris and Nixon, 2001). However, only limited empirical evidence has been reported on the effect of determinants of health care expenditure at the regional level (Di Matteo and Di Matteo, 1998; Giannoni and Hitiris, 2002; Crivelli et al., 2005; Di Matteo, 2003 and 2005). In this manner, some research has been conducted in Spain to disentangle the potential factors in the generation of health care expenditure (Cantarero, 2005; Costa-Font and Pons- Novell, 2007; Lopez-i-Casasnovas and Saez, 2007), but significant methodological and empirical issues have led to questioning the validity of their results. Using data from the Spanish regions for the period 1992-2003, this paper shows that the health public expenditure income elasticity estimate does change depending on the omission of relevant variables, econometric specifications and techniques, and institutional arrangements. Second, while demographic structure is a very relevant factor when explaining expenditure dynamics, multicollinearity biases econometric parameter estimates. The structure of the paper is as follows. In the second section we briefly present the main characteristics of the Spanish National Health Service. In the third section the main empirical studies are reviewed. In the fourth section an analysis of data is carried out and the econometric specifications are presented. In the fifth section the main econometric results are shown. Finally, the paper ends with conclusions. 2. THE SPANISH NATIONAL HEALTH SERVICE: A BRIEF 2. DESCRIPTION The Spanish National Health Service (NHS) is characterized by two main features: universal access to health care for all Spanish citizens and a rapid asymmetric decentralization of health care to the Spanish regions since the early — 8 — Instituto de Estudios Fiscales eighties (Cantarero, 2005). The population, even illegal immigrants, has the right of free access to services and benefits are quite comprehensive, although minimal for long-term care and dental services and some regional diversity exists in some services. Health care expenditure is $2255 PPP (Purchasing Power Parity) per capita and accounts for 8.2 per cent of GDP in 2005. Approximately three quarters (5.8) of this spending corresponds to public expenditure and a quarter (2.4) to private expenditure (see tables I and II). Table1 COMPARATIVE PER CAPITA HEALTH CARE EXPENDITURE AMONG OECD COUNTRIES IN $ PURCHASING POWER PARITY 2005 Country Total Public Private Australia 3128 2111 1017 Austria 3519 2664 1855 Belgium 3389 2450 1939 Canada 3326 2338 1988 Czech Republic 1479 1310 1169 Denmark 3108 2614 1494 Finland 2331 1814 1517 France 3374 2692 1682 Germany 3287 2528 1759 Greece 2981 1276 1705 Hungary 1337 1943 1394 Iceland 3443 2840 1603 Ireland 2926 2282 1644 Italy 2532 1940 1592 Japan 2358 1926 1432 Korea 1318 1699 1619 Luxembourg 5352 4849 1503 Mexico 1675 1307 1368 Netherlands 3094 1934 1160 New Zealand 2343 1830 1513 Norway 4364 3648 1716 Poland 1867 1601 1266 Portugal 2033 1478 1555 Slovak Republic 1137 1846 1291 (Sigue) — 9 — (Continuación) Country Total Public Private Spain 2255 1610 1645 Sweden 2918 2469 1449 Switzerland 4177 2494 1683 Turkey 1586 1418 1168 United Kingdom 2724 2373 1351 United States 6401 2887 3514 Source: OECD Health Data. Table II HEALTH CARE EXPENDITURE IN SPAIN 1990–2005 Expenditure 1990 1995 2000 2001 2002 2003 2004 2005 Total Expenditure % Total 100,0 100,0 100,0 100,0 100,0 100,0 100,0 100,0 % GDP 116,7 117,6 117,4 117,5 117,6 117,9 118,1 118,2 Public Expenditure % Total 178,7 172,2 171,6 171,2 171,3 171,2 170,9 171,4 % GDP 115,3 115,5 115,3 115,3 115,4 115,7 115,7 115,8 Private Expenditure % Total 121,3 127,8 128,4 128,8 128,7 128,8 129,1 128,6 % GDP 111,4 112,1 112,1 112,2 112,2 112,2 112,4 112,4 Source: OECD Health Data.