The Effect of Health Care Cost Growth on the U.S. Economy. Reverse Causation


Rising income leads to higher expenditures on health. Hall and Jones (2004) show that the rising share of health care in GDP may reflect the natural course of economic growth: as individuals get richer, one of the most valuable and productive opportunities for spending is to purchase better health and longer lives.

Several macroeconomic studies show a link between per capita GDP and per capita health care costs. Using data from a sample of 13 developed countries, Newhouse (1977) estimates the income elasticity of national medical care expenditure to be greater than one—that is with rising incomes health care spending rises faster than per capita GDP.  Gerdtham et al. (1992) find that the elasticity of health care expenditure with respect to per capita income was significantly above one in a cross-sectional study of OECD countries, while Hitiris and Posnett (1992) estimate the income elasticity to be at or around unity for the same countries.3 Di Matteo and Di Matteo (1998) find per capita income to be a crucial determinant of Canadian provincial government health expenditures.

This reverse causation could negatively bias estimates of the effect of health care costs on GDP if the true causal effect of health care costs is to suppress GDP. In other words, we might underestimate the harmful effects of health care cost growth on aggregate economic indicators if higher costs are the product of past increases in income.

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