Economics of Health and Health Care - Problem Set 1

Diogo Pinto Baião | 47394

Two different groups of countries were chosen for this analysis to compare the performance of
healthcare systems following two different models – the Bismarck Model and the Beveridge
Model.

The Bismarck Model is a type of multi-payer healthcare system where healthcare is financed
through multiple insurance funds that are typically financed jointly by employers and
employees through payroll deduction. Healthcare providers are usually competing private
entities and patients can choose between them. For this analysis, Germany and The Netherlands
were chosen as examples of countries where the healthcare system follows a Bismarck Model.
Germany is often cited as the main example of the Bismarck Model, and The Netherlands even
though its health system is no longer the typical Bismarck Model private insurers compete to
provide compulsory health insurance and healthcare providers are most of them private.

On the other hand, the Beveridge Model emphasizes government ownership and control of
healthcare services. Healthcare is provided and financed by the government through taxation
and typically delivered mostly by government-owned facilities and providers, so that all
residents have equal access to care. The United Kingdom's National Health Service and Italy’s
Servizio Sanitario Nazionale are well-known examples of the Beveridge Model, with healthcare
services funded and provided by the government. In Portugal, the predominant framework for
healthcare provision is also the Beveridge Model where the National Health Service remains the
primary provider of healthcare services. However, private healthcare services and insurance are
sought after by most of those who can afford to pay for healthcare services since the public
system has lots of difficulties in responding to citizen’s necessities.

Question 1: The Evolution of Total Health Expenditure in 5 OECD countries – Germany, The
Netherlands, Italy, Portugal and The United Kingdom

The countries chosen for this analysis are then Germany and The Netherlands as representatives
of the Bismarck Model and The United Kingdom, Italy and Portugal for the Beveridge Model.
The inclusion of these countries will allow us to check the evolution of Health Expenditures
over time while trying to make an association between those evolutions and the model being
used in different health systems.

Graph 1 describes the evolution of Total Health Expenditure per capita in USD in constant
prices and converted PPP, to account for inflation and to assure that comparisons are not

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skewed by changes in the value of currency over time. With no surprise, Germany, followed by
The Netherlands, has the highest level of expenditure in absolute terms as those are two of the
countries with the highest GDP per capita in the OECD.

The United Kingdom comes right after those other 2 countries as it would be expected by the
levels of GDP per capita of nowadays. In the 90s and early 2000s Health Expenditure per capita
was considerably higher in Italy than in the United Kingdom. Today, it is the opposite by a
substantial amount. Not only did the GDP per capita increase way more in the United Kingdom
than in Italy over the last decades, but also the share of GDP attributed to Health Expenditures
increased by 7pp in the UK in the last 3 decades while in Italy the increase was less than 3pp, as
seen in Graph 2 (Total Health Expenditure as % of GDP). This is mainly due to a higher growth
rate of UK’s NHS budget (5.7% a year between 1997 and 2010) compared to Italy’s growth rate
of SSN (around 3% a year between 2000 and 2008).

Historically, Portugal’s Health Expenditure per capita had been the lowest between the 5
countries, as expected. However, it had been getting closer and closer to Italy’s in the past
decade and finally reaching and surpassing Italy’s during the pandemic. This is against the trend
that we have been seeing for the past paragraphs – Portugal’s GDP per capita is way below
Italy’s but Health Expenditure per capita has been higher both in 2021 and 2022. This can be
seen when taking a closer look at Graph 2. Portugal’s share of GDP allocated to health was
around 11% in the last 2 years while Italy’s was around 9%. This could mean that Portugal’s
share of state budget that was invested in the national health system was considerably higher
than Italy’s. However, if we take a look at Graph 3, what we can conclude is that actually most
of that difference in Health Expenditure per capita is due to Portugal’s considerably higher level
of out-of-pocket payments and expenditure on private health insurances. These reflects both the
difficult that Portugal’s National Health System has in meeting the necessities of its citizens and
the lack of trust that citizens have in that system.

Historically, the two Bismarck countries have higher Health Expenditure per capita and higher
Health Expenditure as % of GDP than Beveridge countries, which might reflect a relationship
between higher income and higher demand for healthcare, more specifically for preventive
healthcare, rehabilitation, long-term and end-of-life care, etc. However, what is also noticeable
through Graph 3 is that Bismarck countries are those with the lowest % of GDP for out-of-
pocket payments and voluntary insurance, which might mean those systems are the ones
respective citizens can rely the most on.

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Question 2: Simple Linear Regression – Effect of Income on Health Expenditure (data from
2022)

A linear regression analysis was conducted using data from 2022 from all OECD countries to
assess the effects of income on health expenditure.

HE i=β 0 + β 1 GDPi +ui

Total Health Expenditure per capita and GDP per capita were used both in USD and in constant
PPP to eliminate the differences in price levels, such that the increase in prices of healthcare
with income are not significant. This way it is easier to measure income effects (elasticity of
health expenditure to income), instead of just finding the relationship that exists between higher
income and higher levels of health expenditure.

Coefficients Standard Error

Intercept 1235.809451 575.0322906
GDP 0.063678416 0.011618265
R Square 0.454876975
Observations 38

From this regression, it is ascertained that, on average, an additional USD of income results in
0.06368 additional USD in total health expenditure.

To compute the elasticity of health expenditure to income, a log-transformation was conducted

to both variables in the regression:

ln HE i=δ 0 +δ 1 lnGDP i+ ε i

Coefficients Standard Error

Intercept -2.9908672 1.165694713
ln(GDP) 1.052797526 0.1094134
R Square 0.72003329
Observations 38

The elasticity of 1.0528 given by the coefficient of ln(GDP) implies that an increase in income
of 1% results in an increase in health expenditure of 1.0528% which is slightly above 1,
suggesting healthcare as a luxury good. As this is really close to 1, it’s important assess whether
it is likely or not that health care is not a luxury good. Testing the null hypothesis that the
elasticity is equal or below 1, a p-value of 0.6323 was obtained which implies the failure to
reject the null hypothesis at any meaningful significance level. We can not reject the possibility
of healthcare being instead a normal good.

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Question 3: Simple Linear Regression – Effect of Income on Health Expenditure (data from
2004)

Conducting the previous analysis using, this time, data from 2004, the following results were
obtained:

Coefficients Standard Error

Intercept 52.10158547 309.6856038
GDP 0.077146238 0.007900732
R Square 0.725911288
Observations 38

In comparison with 2022, something to notice immediately is the increase in the effect of GDP
on health expenditure (from 0.06368 in 2022 to 0.07715 in 2004). Additionally, in 2004 the
model fits the data considerably better. R2, measuring how much the variation in health
expenditure is explained by the variation in GDP, went from 0.455 to 0.726.

Coefficients Standard Error

Intercept -5.048452 0.727990857
ln(GDP) 1.235476898 0.070178619
R Square 0.895931845
Observations 38

The elasticity given by the log-model is 1.23548 which when tested for the possibility of being
equal to 1 results in a p-value of 0.00188, rejecting the null hypothesis for any commonly-used
significance level. Healthcare is implied to be a luxury good using data from 2004 which might
be a good indicator that over the years access to healthcare in these countries has improved.

Question 4: Multiple Linear Regression – Effect of Income and its growth on Health
Expenditure

To study how health expenditure changed over the years in different countries, a multiple linear
regression analysis was conducted using data from the OECD countries to compute average
growth of health expenditure and of GDP between 2005 and 2022, and data from 2004 as initial
levels.

A regression model with the average growth rate of health expenditure per capita as dependent
variable; and GDP per capita in 2004, average growth rate of GDP between 2005 and 2022, and
health expenditure per capita in 2004 as explanatory variables was estimated.

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 HEGrowth=β 0 + β 1 GDPGrowthi + β 2 InitialHE i + β 3 InitialGDP i+ ui

Coefficients Standard Error

Intercept 0.020305376 0.006737569
Initial GDP (2004)
-1.3881E-07 1.99621E-07
Initial HE (2004) -1.155E-06 2.35301E-06
Avg. g(GDP) 0.893801015 0.179218031
R Square 0.634229882
Observations 38

The initial level of health expenditure and the initial level of GDP turned out to be statistically
insignificant, with coefficients very close to zero. Nevertheless, there is, on average, a positive
effect of GDP growth on the growth of health expenditure.

Following Barros (1998) findings, it would be expected that a higher initial level of health
expenditure would negatively contribute to the growth of health expenditure, which is not
verified since the effect of initial health expenditure in its following growth is not statistically
significant in the model.

Question 5: Factors that influence health expenditure

The previous pages only focused on analyzing the relationship between health expenditure and
income, which is omitting other possible relevant variables that may be contributing to the
variation of health expenditure and creating positive or negative bias when assessing the impact
of the level and variations of income on health expenditure. This way, other factors that should
have been accounted for in the previous models are now to be discussed, based on existing
empirical evidence.

Firstly, other than GDP, factors related to demand and supply of healthcare services may be
affecting the level of total health expenditure. Leu (1986) tested for some factors such as the age
of population and the degree of urbanization which influences both the risk of contagion, time
and travel costs. The impact of these variables was found to be not that relevant. In addition to
the effects of income, he got results that showed that an increase in the extent of public sector
provision of health services and government control over the sector had an increasing effect on
health expenditure. However, these results remain in doubt and more recent studies, such has
Gerdtham’s (1992b), did not reproduce these results. Gerdtham et al. (1998) estimated the
effects of risk factors such as the consumption of tobacco and alcohol which were proved
significant and positively correlated with healthcare expenditure. Also, Gerdtham accounted for

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the sizes and types of health systems finding correlation between different types and different
levels of health expenditure. This goes hand in hand with the analysis made in the beginning
where countries that run health systems through the Bismarck Model have levels of health
expenditure higher than those with the Beveridge Model.

Lastly, growth rate of health expenditure per capita disparities between countries may also be
explained by factors besides the ones accounted for in the previous multiple linear regression
model. Barros (1998) tested for factors such as gatekeeping, public reimbursement and
integrated systems, different decades, etc. However, those were found by him to be non-
significant in explaining differences in growth rates, which contrasts with some of the
conclusions by Gerdtham et al (1998). In fact, some of these variables turned out to be more
relevant in explaining differences in levels of health expenditure, more specifically institutional
variables and the existence or non-existence of gatekeeping.

According to Barros (1998), factors affecting levels and growth rates of total health expenditure
are not necessarily the same. While some might be more suitable to address differences between
countries at a given point in time, others might be better in reasoning a faster or slower
evolution of expenditures. This way, a factor, as an institutional one, for example, may be
relevant explaining why some countries have greater expenditures than others, but it does not
necessarily imply that these expenditures will grow faster.

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Appendix

Source: OECD Health Data

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References

Gerdtham, Ulf-G. and Jonsson, Bengt. (2000). International Comparisons of Health

Expenditure: Theory, Data and Econometric Analysis, Ch. 01, P. 11-53. In Culyer, A. J. and
Newhouse, J. P. eds., Handbook of Health Economics, vol. 1, Elsevier.

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spending-on-the-nhs

Culyer, A.J. and Newhouse, J.P. (2008). Handbook of health economics. Vol. 1A. Amsterdam
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Physicians for a National Health Program (2010). Health Care Systems - Four Basic Models |
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