Is the health care price inflation in US urban areas stationary?

Evidence from panel unit root tests

Vasudeva N. R. Murthy, Albert Okunade

Research output: Contribution to journalArticle

Abstract

Purpose: This study aims to investigate, for the first time in the literature, the stochastic properties of the US 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.

Original languageEnglish (US)
Pages (from-to)77-94
Number of pages18
JournalJournal of Economics, Finance and Administrative Science
Volume23
Issue number44
DOIs
StatePublished - Jun 11 2018

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Urban areas
Healthcare
Inflation
Panel unit root tests
Inflation rate
Persistence
Urban health
Insurance premium
Cross-sectional dependence
Insurance
Insurer
Data structures
Econometric modelling
Empirical research
Escalation
Nonstationary processes
Factors
Employers
Asymptotic normality
Unit root

All Science Journal Classification (ASJC) codes

  • Economics, Econometrics and Finance(all)

Cite this

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title = "Is the health care price inflation in US urban areas stationary?: Evidence from panel unit root tests",
abstract = "Purpose: This study aims to investigate, for the first time in the literature, the stochastic properties of the US 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.",
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