On the Health Care Luxury Good Hypothesis

A wide range of research has been developed in the empirical literature regarding income and price elasticities of health care expenditure (HCE). The results are mixed, as researchers employ different methodologies and data sources. The benefits of the panel data method, such as greater data variation, less collinearity, and more degrees of freedom, made it attractive among economists. However, the pooled mean group (PMG) method provides robust estimates compared to conventional methods, such as the mean group estimator and dynamic fixed-effects estimator. As such, this paper applies the PMG method to scrutinize the effect of income and price on U.S. health care consumption using a panel of 46 states. The income and price elasticities were found to be 0.85 and -0.48, respectively, which partially describes the recessionary decline in health care consumption following the Great Recession. In addition, the model reveals that the short-run income elasticity is smaller than the long-run. This confirms that U.S. health care consumption follows the permanent income hypothesis. Consequently, the short-run efficacy of public policies targeting HCE remains limited. The results of this paper suggest reconsidering and adjusting health care policies during a recession so as to avoid probable long-run adverse effects on HCE.