Relationship between Healthcare Expenditure and GDP in Norway: Analysis of Cointegration and Income Elasticity

Background: Income is recognized as most important determinant of health expenditure in many empirical works. Statistical reports from OECD shows that health expenditure and GDP have growing positively in Norway for decades. However, there is gap in empirical researches examining long-run relationship between health care expenditure and income for longer time-series. Objective: To investigate long run relationship between health expenditure per capita and GDP per capita for the period 1970-2012 in Norway and estimate and compare income elasticity of health spending among some OECD countries. Method: A quantitative research method is adopted. This study investigates the relationship between per capita health care expenditure and GDP per capita in Norway over the period 1970 -2012 by employing dynamic version of Engle and Granger error correction mechanism (ECM). It examines unit root properties of the series, by using Augmented Dickey Fuller (ADF) test, and cointegration between health spending and income. Income elasticity of healthcare expenditure for Norway and some other OECD countries is estimated. Both estimations of ECM and elasticity are conducted by OLS regression method. Data for total current health expenditure per capita (HCE) and GDP per capita (PGDP) at 2005 constant price in national currency unit are obtained from OECD online sources. Both HCE and PGDP are natural logarithmic transformed as lnHCE and lnPGDP respectively. Result: A time series unit root test showed that both lnHCE and lnPGDP are integrated of the same order, I(1). Estimation of Error correction model (ECM) confirmed presence of stable long- run equilibrium between health expenditure and income in Norway. Coefficient of error correction (ECT) is negative 0.75 showing fast adjustment to steady sate equilibrium. Short- run parts of the ECM revealed both current and lagged GDP per capita positively determines health expenditure in short run, though they are not statistically significant. Last year s health expenditure has significant effect on current health expenditure. Income elasticities of health spending are more than unity Norway, US, UK, Australia, Finland, the Netherlands and Canada. It was equal to 1.2 for Spain. Conclusion: Series of healthcare expenditure and income have unit root in level and are stationary in difference. There exists steady sate long-run equilibrium between health spending and GDP. Health care is necessary good for Norway. Income elasticity of health spending is not stable over time.