Health financing for universal coverage

The determinants of health expenditure

A country-level panel data analysis

Ke Xu, Priyanka Saksena, Alberto Holly

Publication details

Number of pages: 28
Publication date: December 2011
Languages: English


The rapid growth of health expenditure has become a great concern for both households and governments. There is extensive literature on the determinants of health expenditure in OECD countries, but the same is not true for developing countries. The aim of this study is to understand the trajectory of health expenditure in developing countries. We use panel data from 143 countries over 14 years, from 1995 to 2008 to study this.

We apply both standard fixed effects and dynamic models to explore the factors associated with the growth of total health expenditure as well as its main components namely, government health expenditure and out-of-pocket payments. Our data show great variation across countries in health expenditure as a share of GDP, which ranges from less than 5% to 15%. Apart from income many factors contribute to this variation, ranging from demographic factors to health system characteristics. Our results suggest that health expenditure in general does not grow faster than GDP after taking other factors into consideration.

Income elasticity is between 0.75 and 0.95 in the fixed effect model while, it is much smaller in the dynamic model. We found no difference in health expenditure between tax-based and insurance based health financing mechanisms. The study also confirms the existence of fungibility, where external aid for health reduces government health spending from domestic sources. However, the decrease is much small than a dollar to dollar substitution. The study also finds that government health expenditure and out-of-pocket payments follow different paths and that the pace of health expenditure growth is different for countries at different levels of economic development.