Is the health care price inflation in US urban areas stationary? Evidence from panel unit root tests

Vasudeva Murthy, Albert Okunade

Abstract


Purpose – This study aims to investigate, for the first time in the literature, the stochastic properties of theUS aggregate health-care price inflation rate series, using the data on health-care inflation rates for a panel of 17 major US urban areas for the period 1966-2006.

Design/methodology/approach – This goal is undertaken by applying the first- and second-generation panel unit root tests and the panel stationary test developed recently by Carrion-i-Silvestre et al. (2005) that allows for endogenously determined multiple structural breaks and is flexible enough to control for the presence of cross-sectional dependence.
Findings – The empirical findings indicate that after controlling for the presence of cross-sectional dependence, finite sample bias, and asymptotic normality, the US aggregate health-care price inflation rate series can be characterized as a non-stationary process and not as a regime-wise stationary innovation process.
Research limitations/implications – The research findings apply to understanding of health-care sector price escalation in US urban areas. These findings have timely implications for the understanding of the data structure and, therefore, constructs of economic models of urban health-care price inflation rates. The results confirming the presence of a unit root indicating a high degree of inflationary persistence in the health sector suggests need for further studies on health-care inflation rate persistence using the alternative
measures of persistence. This study’s conclusions do not apply to non-urban areas.
Practical implications – The mean and variance of US urban health-care inflation rate are not constant. Therefore, insurers and policy rate setters need good understanding of the interplay of the various factors driving the explosive health-care insurance rates over the large US metropolitan landscape. The study
findings have implications for health-care insurance premium rate setting,health- care inflation econometric modeling and forecasting.

Social implications – Payers (private and public employers) of health-care insurance rates in US urban areas should evaluate the value of benefits received in relation to the skyrocketing rise of health-care insurance premiums.
Originality/value – This is the first empirical research focusing on the shape of urban health-care inflation rates in the USA.


Keywords


Cross-sectional dependence; health-care price inflation rate; multiple structural breaks; panel unit root tests

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