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Analysis of Public and Private Healthcare Expenditures Author(s): Ramesh Bhat and Nishant Jain Source: Economic and

Political Weekly, Vol. 41, No. 1 (Jan. 7-13, 2006), pp. 57-68 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4417643 . Accessed: 17/12/2013 10:19
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and Private Analysis of Public HealthcareExpenditures

The basic objective of healthcare systems is to meet a country's health needs in the most equitable and efficient manner, while remainingfinancially sustainable. Each country,given the historical evolution of its healthcare system, adopts different strategies to achieve these goals. Thefinancing of healthcare throughpublic and/or private channels is one importantcomponent of this strategy, as it has a significant bearing on the way healthcare is delivered and also has implicationsfor the health policy goals of equity,efficiency and sustainability.Understandingwhat determines these expenditures is important from the viewpoint of health policy. This paper examines the relationship between income and public and private healthcare expenditures.


andpromotive); healthcare (curative, spentonprimary preventive care and the 38.8 per cent on secondaryand tertiaryinpatient rest on non-servicecosts.

he relationship betweenincomeand healthcare expenditurehasbeena focusof research forit helpsus understand Public Healthcare Expenditure the key determinantsof healthcareexpendituresand aboutlinkagesbetweenthe incomefactor In India,publicexpenditure contributes a significantly small providesinformation and demandside of health. These insights help to formulate percentage in healthcare Table1 provides expenditure. compariachieves son of publicexpenditures costsandensurethathealth on health.The comparison of health financing policiesto contain demandtheoryframework, research expenditure its goal. Usingthe standard with some Asian countriessuggests that India's has focused on exploringthe income elasticity of healthcare public healthexpenditure is only 17.9 per cent of the total. Sincetheseminalworkof Newhouse(1977)which Publichealthcare in Indiais composedof states expenditures. expenditure and andcentralgovernment estimatedthe relationship betweenhealthcare allocations. The centreprovidesdirect expenditure this and partial(matchinggrant)supportto the states for meeting (GDP),manystudieshaveexamined grossdomestic product and in different contexts healthcare and non-recurring of programmes under relationship explainedwhy recurring expenditure hasincreased so muchin thepasthalfcentury. Most this policy initiative. The states' share in the total revenue expenditure of these studieshave been carriedout in developedcountries. expenditure has been decliningdue to theirfiscal problems and The studies vary from countrylevel analyses to a much dis- centralsupport in theirbudgetary is increasing. allocations This in Figures1 and2, thoughthe changeis significant analysisat the level of the provinceor state.One of is illustrated aggregated the areasof these analyseshas been a focus on understanding in percentage terms. In some of these Trend of public healthcare expenditure at state level: State the incomeelasticityof healthexpenditures. costshavegoneupsignificantly overtheyears governmentrevenue expenditurefor medical and healthcare healthcare settings, and expenditure-income in- increasedmorethanthreetimes from Rs 50 billion in 1992 to analysisprovidessome interesting issues. The other over 150 billion in 2001. Around1996 there was a sharpdip sights into healthpolicy and health-financing rationale forsuchstudieshasbeento examinetheissueof whether in publichealthcare acrossall states(as shownby expenditures healthcare at a marginhas been providing"care" the dotted line in Figure 3), after which it again increased. expenditure asluxury (denoted good)or"cure" (beinganecessitygood).Many Keepingin mindthe sharpdip in 1996, if we divide the period studies agree that there is a relationshipbetween GDP and being studied into two parts, from 1990 to 1996 and from in various butdisagree healthcare on whether 1996 to 2002, we can see (Table 2) the variationsin public expenditure settings the healthis a necessity or a luxury. healthcare for these two as well as for the entire expenditures time period. Publichealth of all statesexceptAssamwentdown II expenditure in theperiod1990-96butincreased theperiod1996-2002 during Current Status for all statesexcept UttarPradeshand Assam.Overall,in this In India,privatehouseholds'contribution to healthcare is 75 periodit increased for mostof the statesexceptAssam,Gujarat, per cent. Most of these costs are out-of-pocketcosts. State Orissaand UttarPradesh.But, if we observeper capitahealth contribute15.2, the centralgovernment 5.2, and expenditure as percentof percapitagrossstatedomestic governments product insurance and employersput in 3.3 per cent of the (GSDP), in real termsfor the same period,a differentpicture third-party total.Localgovernments and foreigndonorscontribute 1.3 per emerges.The percentage shows spendingof stategovernments cent (WorldBank 1995). Out of this amount,58.7 per cent is a decliningtrend(Figure4).

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Figure 1: State Government Revenue Expenditure on Health


Figure 2: Central Government Revenue Expenditure on Health

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An analysis of public healthcare expenditure as a percentage of GSDP shows thatBiharand UttarPradeshhave not faredbadly.
Comparatively, major states like Maharashtra, Madhya Pradesh

in different periods. During period 1991-2003, Total Revenuexpenditure Health the over theExper Table in 5 provides PHE grew information atincomeRevenue annum eal terms 10.Government whereas per capita years. This implies that PHE has much higher at a than income growth beengrown

and Gujarat, have not done well. States like Bihar, Assam, Andhra Pradesh and Punjab show high fluctuation in public health expenditure to GSDP ratio while for other states like Maharashtraand Gujaratthis ratio has remained constant. The analysis clearly shows that in almost all the states, public health expenditures as per cent of GSDP has not increased much during the past decade. In fact, during the period 1994 to 2002 healthcare expenditure as a percentage of GSDP shows a declining trend (Table 3). From the Table 3 we can see that for all the states public health expenditure as a percentage of GSDP went down significantly in the period 1990-96; for the period 1996-2002 it again went down except for AndhraPradesh,Madhya Pradesh,Maharashtra, Orissa, Punjab and West Bengal. This shows that government priority for healthcare expenditure is decreasing over the years in all the states as indicated below.
PercentageDecrease (1990-2002) Morethan40 per cent Between30 to 40 percent Between20 to 30 percent Less than 20 per cent States Gujarat AndhraPradesh, Karnataka, Kerala, UttarPradesh,TamilNadu Orissa, West Bengal, Bihar, Maharashtra, Rajasthan MadhyaPradesh, Punjab,Assam

about final consumption the growth rates of PHE, PCI and expenditure. private per capita income grew at 3.76 per per cent during during the same period. period. per capita grew

perature orexpend private final consumption expenditure. Studies reat 10.88ed to relationship between ealth expenditure and

iture in different


od 1991-2003,

III incoThe an income growth in PHE has between health expenditure growth Literature Review
Studies related to relationship between health expenditure and income: The relationshipbetween healthexpenditureand income has received significant analytical attention. One importantfinding in earlier studies has been that the ratio of healthcare expenditureto GDP increased as countries developed economically andindustrially.Abel-Smith (1963, 1967) foundthatafteradjusting for inflation, exchange rates and population, GDP is a major determinantof health expenditure. In a seminal paper, Newhouse (1977) raised the question about what determines the quantity of resources a country devotes to medical care and suggests that per capita GDP of the country is the single-most importantfactor. This study found a positive linear relationship between the percentage of health care expenditure to GDP and GDP. Gerdtham et al (1992) used a single cross-section of 19 OECD countries. They found PCI, urbanisation, and the share of public financing in total health expenditure as positive and significant Table 1: Public Expenditureon Health as Percentage of Total Expenditure, 2001
Country Bhutan Maldives Democratic People's Republicof Korea Thailand Sri Lanka Bangladesh Nepal Indonesia India Myanmar Percentage 90.6 83.5 73.4 57.1 48.9 44.2 29.7 25.1 17.9 17.8

Selvaraju (2000) reasons that when economic liberalisation was initiated in 1991. healthcare, as other sectors, faced expenditure contraction. The expenditure subsequently went up in 1996 after the situation improved.

Private Healthcare Expenditure

Private expenditure on health (PHE) as a per cent of per capita incomehas almost doubled since 1961. Table 4 shows the average per capita private health expenditure as per cent of per capita income (PCI) in different periods since 1961. The PHE as per cent of PCI has increased from 2.71 during 1961-70 to 5.53 during 200 1-03:


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Figure 3: Per Capita Public Healthcare Expenditure


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that healthcareis neither "a necessity" nor "a luxury"but "both", since the income elasticity varies with the level of analysis. With insurance individual income elasticities are typically near zero while that of nations is mostly more than one. Studies on issues of stationarity and cointegration: On the other hand, studies using the cointegration approach to health expenditure and income have reached contradictory conclusions. Gerdthamand Lothgren (2000), explaining these contradictions, show thatthe difference in conclusions regardingstationarityand cointegration between health expenditure and income in the previous studies depended on whether they were conducted on individual or pooled series and, also on whether time trends were included in the estimations. They conc!ude that health expenditures and income for a panel of OECD countries have unit roots and they are cointegrated.
Table 2: Growth of Per Capita Public Healthcare Expenditure (in Real Terms) Change (in Rs Million) PercentageChange 19901990-96 19961990- 1990-96 19962002 2002 2002 2002 Andhra Pradesh Assam Bihar Gujarat Karnataka Kerala MadhyaPradesh Maharashtra Orissa Punjab Rajasthan TamilNadu UttarPradesh West Bengal AllIndia(States) -211.1 3.4 -111.7 -156.6 -103.6 -73.2 -103.6 -144.2 -186.9 -414.9 -86.7 -44.6 -160 -35.5 -107.8 263.4 -15.5 160 110.3 270.3 172.2 161.1 278.3 154.3 583.8 152.1 134.5 -5.3 251.8 160.8 52.3 -12.1 48.2 -46.3 166.7 99.1 57.5 134.1 -32.6 168.9 65.5 89.9 -165.2 216.3 53.1 -28.16 00.56 -26.25 -17.48 -13.23 -07.99 -18.54 -16.80 -30.32 -33.29 -10.95 -05.07 -26.40 -05.69 -14.90 48.92 -02.56 50.96 14.91 39.79 20.43 35.41 38.97 35.92 70.20 21.60 16.09 -01.18 42.76 26.14 06.98 -02.01 11.33 -05.17 21.30 10.81 10.30 15.62 -05.29 13.55 08.28 10.20 -27.27 34.64 07.34


Figure 4: Public Healthcare Expenditureto GSDP Ratio

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variables. andPosnett Posnett(1992) (1992) used pooledtime variables. Hitris Hitris and used 560 time series series 560 pooled cross section section observations from 20 20 OECD countriesover and cross and over observations from OECD countries period1960-87 1960-87and andfound founda strong strongand the the period and positive correlation positive correlation between per capita health spending and GDP. Other related studies, such as of Hansenand King (1996), McKoskeyand Selden(1998),Gerdtham andLothgren (2000), Karatzas (2000) is dependent on the GDP of agreethathealthcare expenditure the country. Studiesrelatedto elasticityof health expenditure and income: Whetherhealthcare is a luxuryor necessity is important from the viewpointof estimatingfutureexpenditure on it. This is becauseif healthcare is a luxuryproduct it will consumeanevershareof national income.It also has implications for increasing the link between healthcareexpenditureand economic wellnormal of healthlikeinfantmortality measures being.Generally, foralmost rate,deathrate,morbidity, etc, aremoreor less similar equallydevelopedcountries(for examplein OECDcountries). But healthcare spendingmay differ more than these normal measures.There may be a situationin which the utility of healthcare canbeverylow aswe cansee fromEngel's expenditure curve and Engel's law. Newhouse (1977) argues that since incomeelasticityof healthcare is greaterthanone, expenditure itcouldbetreated asa"luxury" [likeNewhouse good.Somestudies et al 1992]foundtheelasticitygreater thanone 1977;Gerdtham whilemanyotherstudies[Manning et al 1987;McLaughlin 1987; Di Matteoand Di Matteo 1998] found it much less thanone. Getzen(2000) in his paperanalysesthe literature andconcludes

Table 3: Change in Public Healthcare Expenditure to GSDP Ratio (in Per Cent) 1990-96 Andhra Pradesh Assam Bihar Gujarat Karnataka Kerala Pradesh Madhya Maharashtra Orissa Punjab Rajasthan TamilNadu UttarPradesh West Bengal -40.51 -05.79 -19.21 -38.11 -31.08 -31.20 -31.14 -37.15 -31.53 -40.24 -26.81 -30.40 -28.96 -25.90 1996-2002 16.46 -06.55 -05.14 -07.95 -00.33 -05.61 18.24 21.36 16.30 44.05 -00.74 -11.56 -12.90 03.49 1990-2002 -30.72 -11.96 -23.36 -43.03 -31.31 -35.07 -18.58 -23.72 -20.37 -13.91 -27.35 -38.45 -38.12 -23.31

Table 4:Private Health Expenditure as Per Cent of Per Capita Income in Different Periods Period 1961 to 1970 1971 to 1980 1981 to 1990 1991 to 2000 2001 to 2003 Average (in Per Cent) 2.71 3.27 3.72 3.26 5.53

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Studiesrelatedto use ofpanel data:Paneldatasets foreconomic researchpossess several major advantagesover conventional cross-sectional or time seriesdatasets [e g, Hsiao 1985a, 1995, of paneldataare thatthey usually 2000]. The mainadvantages give a large numberof data points, increasingthe degree of freedomand reducingthe collinearityamongexplanatory variables- henceimproving theefficiencyof econometric estimates. The use of panel data also providesa means of resolvingor of the problemof presenceof omitted reducingthe magnitude or unobserved) variablesthat are correlated with (unmeasured variables. explanatory paneldatahasmanyadvantages, Although a problemcan ariseif severaltrendingvariablesare presentin panel data regressions, for example, health expenditure andGDP.Phillips(1986) shows thatregressions involvingnonvariablesmightlead to spuriousresultsshowingapstationary even if variables aregenerated parently significant relationships independently.
Table 5: Growth Rates in Various Sub-Periods Variable 1961-2003 PHEn PHEr PCIn PCIr PCEn PCEr 11.30 3.44 10.22 2.36 9.21 1.35 1961-70 9.91 2.54 8.73 1.37 7.86 0.50 1971-80 13.70 5.84 8.89 1.03 8.24 0.37 1981-90 7.62 -0.01 10.74 3.11 9.17 1.54 1991-2003 17.92 10.88 10.83 3.76 10.29 3.22

Studiesrelatedto healthfinancing in India:In India,thereare few studies which have touchedupon the issue of healthcare financing.The first study in this areawas in Singpurfocusing on private household andgovernment on healthcare expenditure Ahmedabad [GoI 1946]. The IndianInstituteof Management, carried out a studyof healthfinancecoveringall levels of health - state, municipal,corporate and household[IIM expenditure healthcare ex1987]. Duggal (1996) discusses public-private Bhat (1996) discussesthe regulation of the private penditures. sectorand whetherpublic-private can generaterepartnership sourceswhile also ensuringthat vulnerable groups- the poor - have access to healthfacilities.These and ruralpopulations studiessuggestthatIndia'sdependence on the privatesectorin healthcare is very high. Utilisationstudiesshow thata thirdof in-patients and three-fourthsof out-patientsutilise private healthcare facilities [Duggaland Amin 1989; Yesudian1990; Visariaand Gumber1994]. In anotherstudy,Mahal(2000a and 2000b) tries to find the distribution of publichealthsubsidiesin Indiain different states. a considerable desire for "equity"in public policy Despite documents, they found thatpublic subsidieson healthare undistributed across different socio-economic Mahal equally groups. (2000b) finds that 31 per cent of public subsidieson health accruedto urbanresidents,higherthantheir25 per cent share in the total population.

Notes: PHE:privatehealth expenditure,PCI:per capita income, and PCE: final nandrdenotevariables private consumption expenditure. Subscripts expressed in nominaland realterms respectively. Table 6: Unit-Root Test Statistics Variables used in the Study Imet al# ADF- ChoiZ-stat## ADF-FisherChi-square## t-statistics probabilityt-statistics probability t-statisticsprobability Per capita PublicHealthcareExpenditure(PHCE) PHCE -0.9940 0.1601 31.903 0.2785 0.1436 32.4183 0.2578 In(PHCE) -1.0644 Per capita Gross State Domestic Product(GSDP) GSDP -2.46686 0.0068 51.1025 0.0049 55.1817 0.0016 In(GSDP) -3.20194 0.0007 -0.97335 -1.08736 0.1652 0.1384

IV of Public on Health Analysis Expenditure

To estimate the relationshipbetween income and public healthcare we use realpercapitaGSDPto represent expenditure, incomeandrealpercapita statepublic health (PHCE). expenditure In this analysis,healthcare refersto states'expenexpenditure ditureanddoes not includethe centralgovernment's allocation for familywelfareprogrammes. The expenditure on healthalso does not include budgetaryallocationsto water supply and sanitation.Forthe purpose of this studywe haveincluded those 14 states that accountfor more than 90 per cent of the total of the country.The statesincludedin the studyare: population AndhraPradesh,Assam, Bihar, Gujarat,Kamataka,Kerala, Pradesh, Tamil Maharashtra, Orissa, Madhya Punjab, Rajasthan, Nadu,UttarPradeshand West Bengal.The time periodof the study is from 1990 to 2002 and the main sources for the realexpenditure were the databasemaintained by Centrefor IndianEconomy(CMIE)anddifferent Monitoring government publications. Univariate Analysis of Time Series Data To estimatewhether thereis a long-term relationequilibrium incomeandhealth recent studies have shipbetween expenditures, used time series analysisof these variables. However,the time seriesanalysisposes a number of methodological We problems. can estimate methodonly if the relationships through regression series are stationary. in a time series refers to a Stationarity conditionwhere the series has a constantmean and constant variance.While estimatingthe relationship betweenPHE and PCI the stationarity propertyof the time series variablesis essentialin modelestimation becausemostof thestatistical tests havebeendevelopedfor stationary time series. (time-invariant) or its lack in a series can stronglyinfluence its Stationarity Economicand PoliticalWeekly January 7, 2006

-2.07862 0.0188 -2.62877 0.0043

Notes: Imet al test and ADFtest statisticsforPHCEhave been estimatedwith constantand forGSDP withconstant and trend. # Probabilities are computedassuming asympoticnormality. ##Probabilities forFishertests are computedusing an asympoticChiAllothertests assume asymptoticnormality. square distribution. Table 7: Unit Root Test (Im et al) States Variables Logof Variables PHCE GSDP++ In(PHCE)" ln(GSDP)++ t-Stat Prob t-Stat Prob t-Stat Prob t-Stat Prob -2.36 0.38 -1.70 0.41 -3.12 0.15 -2.22 0.44 -2.26 0.20 -2.29 0.41 -0.39 0.97 -1.71 0.40 -0.62 0.95 -2.73 0.25 -3.00 0.07(2) -2.60 0.28 -2.07 0.51 -1.15 0.66 -2.67 0.26 -4.23 0.03(1) -2.46 0.15(1) -3.270.12(1) -3.65 0.07(1) -1.81 0.36 -3.40 0.10(1) -2.48 0.33 -0.32 0.89 -1.92 0.58 -7.76 0.00 -1.70 0.41 -9.00 0.00 -3.50 0.09 -1.64 0.43(1) -4.36 0.03 -2.94 0.19 -2.41 0.16 -3.23 0.13 -2.79 0.23 -2.66 0.11(2) -2.40 0.36 -2.15 0.47 -0.34 0.88(2) -2.17 0.46 -0.66 0.95 -1.59 0.46 -1.71 0.69

Andhra Pradesh -1.56 0.47 Assam -2.24 0.20 Bihar -1.78 0.37 -2.98 0.07(2) Gujarat Kamataka -1.05 0.70 Kerala -2.09 0.25 Pradesh-1.77 0.38 Madhya Maharashtra -0.11 0.93 Orissa -1.69 0.41 -2.07 0.26(2) Punjab -2.43 0.16 Rajasthan TamilNadu -2.72 0.10(2) UttarPradesh -0.33 0.89(2) WestBengal -1.49 0.51

Notes: # Exogenous variables: Individual effects. ++Exogenous variables: Individual linear trends. Figures in bracketshows effects, individual numberof lags.


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behaviourand properties,e g, persistenceof shocks will be series do not show unit roots then there is no need to test for series. infinitefor non-stationary cointegration. Most of the time seriesdatagenerallyhave trend,cycle, and/ it should thesedeterministic orseasonality. By removing patterns, Unit Root and Stationarity Test Results In case the be possibleto makethe remaining series stationary. invalid Unit root tests were done on both In PHCE and In GSDP arenot stationary, timeseriesvariables theycan produce inferences. and Newbold (1974) have shown thatin a separately (Table6). Whileestimating presenceof unitrootsin Granger PHCE we and it was found thatPHCEdoes not to a of used constant can lead the estimation series, problem non-stationary The Durbin-Watson show presenceof unitroots. In both the tests, i e, Im et al and regressionwith a high R-square. spurious statisticnearto zerois mainlydue to the use of a non-stationary ADF, unitroot was not found.This meansthatreal per capita is stationary. dataseries.Thismeansthatthe estimatesof the modelmayturn public healthcare expenditure We the of but the have observe out to be statistically relationship may presence trendsin GSDP data,therefore significant unitrootin GSDPwe estimate it in thepresence nomeaning. Hence,we shouldfirststudythestationarity property whileestimating of constant andtrend.Herealso we findno evidenceof unitroot of the time series variables. we can say thatreal The first step in checkingthe stationarity by bothIm et al andADF tests. Therefore Testingstationarity: GSDPis stationary. Thestatelevelresults arepresented of datais plottingit and observinghow it behaves.The GSDP percapita andPHCEplotsof the chosen 14 statesgive a roughidea about in Tables7 and 8. FromTables 7 and 8, we can see thatfor Maharashtra and UttarPradesh,PHCE shows the how these variablesare behavingacrossthem. Fromthese we Karnataka, trendfor all the states,as presenceof unitroots while for BiharandWest Bengal,GSDP observethatGSDPshows an upward of unitroots.Sinceboththeseseriesarestationexpectedwith risingincomes.But thereis no trendas such in showspresence PHCE. ary, there is no need to test for cointegration. Forusingtimeseriesdata,thetestof unitrootis veryimportant Here we are using panel data which is for testingstationarity. Computing Elasticity of statesso we use panelunitroot time seriesdatafor a number tests. Testingunit root in panel data is a recentphenomenon. Fromtheliterature percapitapublichealthcare expenditure by is assumed to be a function Levin and Li (1993) gave a test for unit root in panel databut stategovernments of percapita GSDP. on the The model is specified in log-log form so that the coefficient this test (andothers)involvestoo restrictive assumptions Now more flexible tests estimatesare elasticityand therefore enableus to interpret the of slope parameters pooledregressions. of healthcare like IPStest [Imet al 1997]andMWtest [Maddala relationship andincome.We use the areavailable expenditures andWu 1999]whicharebasedon theAugmented Dickey-Fuller following model to estimatethis relationship: In PHCEit = a + P3*ln GSDPit + E (ADF) equation. The standard approach to test for non-stationarity of where/, will give the elasticityof PHCEwith GSDP and e is eachobservedtime series y observedover T time periodsin the residual. a panelis to estimatean ADF regressionhere includinga time Method Another consideration is whether of estimation: important trend: effect (RE) paneldatais a fixed effect (FE) modelor a random model. The FE model is a reasonableapproach when we are Ay. = ai +56+Piy,- I+ poAyi -,+e., i = 1, ..,N; t = 1,...,T confidentthat the differencesbetweenunits can be viewed as j=1 shiftsof the regression function.In othersettings,it parametric where A yi. = yi - y., -_ . The number of lags p should be large might be betterto view individualspecific constantterms as distributed acrosscross-sectional units.Thiswouldbe The null randomly enough to make the residualsserially uncorrelated. if we believed that cross-sectional unitswere = appropriate that the data for the sampled hypothesisHo:A, 0, generating process The generallyacceptedway of series for panel group i can be characterised as a difference drawnfroma largepopulation. I (1) process,are tested againstthe trendstationary stationary Table 8: Unit Root Test (ADF) alternative H1: 61< 0 basedon the t-statisticof the Pi estimate Variables Logof Variables [Campbelland Perron1991 and Hamilton1994 for thorough States PHCE# GSDP++ In(PHCE)#In(GSDP)++ treatments of the univariate unit root tests]. Prob Prob Prob Prob Since unit roottests are knownto have low powerin distin0.47 0.38 0.41 0.15 null and a stationary but AndhraPradesh guishingbetweenthe non-stationary Assam 0.20 0.44 0.20 0.41 in the individual state series with alternative, testing persistent Bihar 0.37 0.97 0.40 0.96 of ADF equation Gujarat 0.07 0.24 0.07 0.29 only nineyearsof annualdata,the parameters 0.70 0.51 0.66 0.27 will notgive precise measures. dimension Karnataka Usingthecross-section 0.25 0.03 0.15 0.12 of data one can increasethe power of the unit root test. Im Kerala Pradesh 0.38 0.07 0.36 0:10 Madhya et al treated data as N independent, perhaps homogenous Maharashtra 0.93 0.33 ~0.90 0.58 0.41 0.00 0.40 0.00 processes,thateithercontainunitrootsor not.Thus,as the time Orissa 0.26 0.09 0.43 0.02 andthecross-section dimension increase,unitroottest statistics Punjab 0.16 0.19 0.16 0.13 Rajasthan can be derivedthatconvergeto normallydistributed variables. TamilNadu 0.10 0.23 0.11 0.36 Im et al proposean approachto performunit roots tests for UttarPradesh 0.89 0.48 0.89 0.46 0.51 0.95 0.46 for unit root is West Bengal 0.68 paneldata.Anothertest, which was performed MW [Maddala and Wu 1999] based on the ADF equation.If Notes: # Exogenous variables:Individual effects. ++Exogenous variables: the two series have unit roots and it is of the same orderthen Individual lineartrends. effects, individual Figuresin bracketshows numberof lags the next step is to test for cointegration. However,if both the Economicand PoliticalWeekly January 7, 2006


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test. The choosingbetweenFE and RE is runninga Hausman Hausmantest checks a more efficient model against a less efficientbutconsistent modelto makesurethatthemoreefficient model also gives consistentresults.Given a model and datain which FE estimationwould be appropriate, a Hausmantest checks whetherRE estimationwould be almost as good. In a FE kindof case, the Hausman test is a test of H0:thatRE would be consistentandefficient,versusH1:thatRE wouldbe inconas chi-square. sistent.The resultof the test is distributed So if theHausman is large,one mustuseFE.If thestatistic teststatistic is small, one uses the RE model. Elasticity computation: The Hausman test was used to model.Threedifferent determine whether it is a fixed or random modelswereusedto calculateelasticity.Fromthe Hausman test for (H-value0.14) it was found that RE model is appropriate this case. But we see here that there is not much difference between the coefficients of GSDP in all the three models. calculated Elasticity by this methodcomes to between0.65 and 0.71 (Table9). The state level elasticityresultsare presented in Table 10. Target Health Expenditure of States The analysispresentedin the previoussection suggeststhat for every 1 per cent increasein state PCI, state level health hasgone upby 0.684 percent.To estimate thetarget expenditure PHCE/GSDP ratiostates follow, we used the methodologyof adaptiveexpectationmodel and estimatedthe ratio of health as per cent of GDP which governments incuron expenditure in economic models of healthcare. are important Expectations in macroeconomic models,and .dynamicprocesses,particularly findingwaysto modelthemis oftena difficulttaskfortheapplied economist using time series data. The adaptiveexpectations modelhasbeenone of theearliestapproaches developedfor this purpose. Supposeone postulatesthattargetpublichealthexpenditure (PHCE*)at time t is relatedto GSDP as follows: whereX, is targetratioof healthspendingas percent of GSDP. Oneassumesthatstatesarenotspending exactlyas perthisratio. It aims to achieve this targetover a periodof time with some This can be modelledas follows: speed of adjustment. thisequation andsubstituting thevalueof PHCE Simplifying in above equationgives us the following equation: + (1-6) PHCEt_ PHCE:= 6 PHCEt*
PHCEt = 680 + 6X GSDPt + (1-6) PHCEt+1 + 68t i = al/(l-o2) (PHCE, - PHCEt, ) = 6 (PHCE,* - PHCE,i,) PHCE* = 30 + AXGSDPt + lt

instrumental variables(IV) estimatorsand panel generalised method of moments(GMM) estimatorsin the estimationof dynamicmodels.Here to avoid the problemsof heterogeneity andbiasescausedby the laggeddependent we use the variable, basedon ArellanoandBond(1991) and panelGMMprocedure Arellanoand Bover (1995). The panel GMM estimatoruses In ourestimations, we use instruments for instrument variables. righthandside variables.The resultsof the lagged dependent GMMestimator basedon ArellanoandBover (1995) aregiven in Table 11 and the estimationbased on it uses orthogonal deviationsand removesthe individualeffects. Fromthe Table 11 we observethat the value of Xl is 0.431 in per cent. This meansthaton an average,state governments Indiahave a targetof 0.43 per cent of GSDP spendingon the healthcare. Thisis thatpercentage of incomewhichgovernments will spendon the healthcomponent. Thisfigureof 0.43 percent has very important implicationsat policy level. The central has said in its recentlyreleasedcommonminimum government that 2 to programme it wantsto increasehealthcare expenditure 3 percentof GDP.Theachievement of thisgoaldepends critically on the state budget allocations.Given the currentlevels of
Table 9: Estimation of Elasticity using Panel Data Methods Model OLSwithout groupdummyvariables Least with andperiod effects squares group Randomeffects model Hausmantest Constant Variable t-value R2 -1.649 -2.207 -1.932 0.14 0.653 18.144 0.646 0.714 07.023 0.918 0.684 0.830

Notes: Hausmantest favoursRandomEffectModel. Table 10: Elasticity Estimates of Individual States State Andhra Pradesh Assam Bihar Gujarat Karnataka Kerala MadhyaPradesh Maharashtra Orissa Punjab Rajasthan TamilNadu Uttar Pradesh West Bengal Constant Variable t-value 2.19 11.07 1.25 1.50 1.20 2.54 0.30 2.79 3.83 -4.15 2.70 3.28 24.52 -0.39 0.23 -0.79 0.30 0.32 0.35 0.22 0.42 0.17 0.02 0.93 0.19 0.14 -2.36 0.52 1.63 -1.47 0.93 2.17 4.10 1.80 2.49 1.22 0.09 2.39 1.83 2.48 -6.41 3.58 AdjR2 0.017 -0.044 -0.664 0.142 0.297 0.084 0.082 0.004 -0.091 0.178 0.032 0.106 0.660 0.386 F-Value 1.20 0.49 0.25 2.98 6.07 2.10 2.07 1.04 0.00 3.60 1.40 2.42 24.30 8.53

Note:Whiteheteroscedasticity robustcovariancematrix.

PHCEt= ao + a(GSDPt + a2 PHCEt- + Et Fromthe above we can estimatethe targetratio follows: whereAX is targetof GSDP which shouldbe spenton PHCE. The estimationof the above model using panel data poses methodological problems. Thoughthe panelestimation through the FE andRE modelscontrolsfor unobservable heterogeneity, the specificationof the model is dynamicas it has a lagged variable as an independent The presenceof variable. dependent a lagged dependentvariable on the right hand side causes considerable difficultyin estimation,as the errortermmay be but moreseriously,the laggeddependent variauto-correlated; able is correlated with the errorterm when we jse FE or RE models [Greene2003]. Related literature suggests the use of

Table 11: Estimation of Target Spending on Health using Panel Generalised Methods of Moments Estimation
Variables PHCEt.1 GSDP R-squared AdjustedR-squared S E of regression Sarganstatistic## probability Sarganstatistics .1 Coefficient 0.548750 0.001943 0.3929 0.3889 7.4833 1'3.1399 0.3589 0.431 per cent t-ratio# 13.81' 16.95'

Notes: * significant at 1 per cent level of significance. # t-stats are Whiteheteroskedasticity correctedestimates. ## Sargan's Statisticis a specificationtest of overriding restrictibns, whichtests forthe absence of correlation betweenthe instruments and the error term.


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spending,this goal looks very ambitiousand to achieveit the state governments need to reformsignificantlyand prioritise inthehealth Thiswill require sector. significant political spending will andchangeof mind-set.This is all the moreso when with inevery 1 per cent increasein GSDP the healthexpenditure creases by a mere 0.684 per cent.


Healthcare of Private Expenditure Analysis

National accounts statistics of India provide final private of householdsand of non-profit inconsumption expenditures thecommodthatservehouseholdsestimated stitutions through foreach Intermediate ity flow method. expenditure consumption and all final consumption (includingimportsand exindustry institutions aretaken ports)otherthanhouseholdandnon-profit from the total amountof goods and services at marketprices. with Thesubject areclassifiedintoeightcategories expenditures Household services asoneof thecategories. medical careandhealth on medicineand servicesis estimatedon the basis expenditure availablein of the valueof percapitaconsumption expenditure various of NSSOconsumer surveys. expenditure Receipts reports of theCentral on account Government by thecentral government HealthScheme(CGHS)compiledfromthe centralgovernment The budgetarealso takenas an itemof household consumption. dataon outputandpricesare mostlythe same as those utilised would reflect on the for GDP estimatesand its shortcomings measurement of privateconsumption as well. Unit Root Tests We plottedthe behaviour of per capitaprivatehealthexpenditure finalconsump(PHE),percapitaincome(PCI)andprivate tion expenditure (PCE)in termsof theirlevels and first differof these plots suggests that the ences of levels. Examination variablesare not stationaryand contain a linear trend.This characteristic has beenincorporated while specifyingthe model and analysingthe data. The first step in statisticaltesting of the non-stationarity of time series datais to test for the randomwalk using unit root test of levels and first dfferenceof series. As discussedearlier series in estimating relationsmay give usingthe non-stationery results.In case the firstdifferenceis stationary (hasno spurious unit root) then the series is describedas having integration of order1 andis denotedby I(1). If two time seriesare integrated of orderor 1(1), the correlation coefficientbetweenthem will tendtowards aneconomicrelationplusor minusunity,whether ship betweenthem exists or not. In case we do find unit root presencein firstdifferences,we carryout the processof taking thefurther difference till theunitrootproblem Thestage persists. at whichwe findthe absenceof unitroot,we areableto identify the orderof the integrated process for the series. In orderto testthe unitrootof a seriesit is usefulto formulate its behaviour as simpleauto-regressive process.Forexample,if we considera simple AR(1) process: y, = py, - I + x,'8 + Et (1) where xt' are optional exogenous regressors which may consist of constant, or a constant and trend, p and S are to be estimated,and the ? are assumed to be white parameters noise. IfI p 1>= 1, yis a non-stationary seriesandthe variance of y increaseswith time and approaches infinity.If IpI <1, y is Economicand PoliticalWeekly January 7, 2006

a stationary series. Thus, the hypothesis of stationarity can be evaluated by testing whether the absolute value of p is strictly less than one. Three tests which are standard in literature, Augmented Dickey-Fuller (ADF), Phillips Perron (PP) and Ng and Perron (NP), were carried out to find that whether unit root is present in the data or not (see Appendix 1 for the details of these tests). Table 12 presents the results of unit root tests of PHE and PCI. All the three tests indicated that there is a unit root in the data. The results indicate that the PCI and PHE are not stationary in their levels. All three tests indicated in Table 12 suggest that the first difference of log values of PCI and PHE (both expressed in real terms) are stationary. Hence both In(PCI) and In(PHE) are integrated to the order 1 or I(1). It is well documented in the literature that unit root tests have low power to reject the null hypothesis. Hence, if the null hypothesis of a unit root is rejected, there is no need to proceed further. One important property of variables having I(1) property is that their linear combination can be I(0). This means the linear combination of
Table 12:Unit Root Test Statistics of Levels and First Difference of Variables AugmentedDickey-FullerPhillips-Perron Ng-Perron GLS) (MZt t-statistics Probability t-statistics Probability Intercept With Trend Per capita income (PCI) PCI -2.3374 0.1659 2.6669 1.0000 -0.9214 0.7713 -2.3228 0.4128 d(PCI) PCIr 0.1737 0.9970 1.2100 0.9999 -7.5871' 0.0000 d(PCIr) -7.0050* 0.0000 0.5847 -2.3943 0.3771 In(PCI) -1.9987 -5.7721' 0.0001 d[ln(PCI)]-5.7721' 0.0001 0.7508 -1.4862 0.8186 In(PCIr) -1.6610 -7.5441' 0.0000 -11.4397' 0.0000 d[ln(PCIr)] Per capita private health expenditure (PHE) PHE 1.1943 0.9999 4.3162 1.0000 0.1115 -2.1994 0.4773 d(PHE) -3.1522 -3.8501 0.0251 1.6278 1.0000 PHEr 0.1336 -2.9633 0.1546 d(PHEr) -3.0428 0.7823 -1.0436 0.9265 In(PHE) -1.5835 -4.2213' 0.0094 -4.1744' 0.0106 d[ln(PHE)] -0.7027 0.9663 In(PHEr) -4.3543' 0.0076 -4.0853* 0.0133 d[ln(PHEr)]-4.1385_ 0.0116 1.8152 -0.5711 4.5663 -3.1407' 0.2403 -2.7506" 2.9624 -3.2815 -1.1501 -1.9786 0.1593 -3.2097" -1.2062 -3.0038* -1.2096 -3.2022"

-5.7449 -12.6312 -1.0495 -1.9840 0.5394 -3.1391 -2.1213 -2.5357 0.6218 -1.9859 -2.7998 -2.9910" 1.2753 -1.9255 -2.9374 -3.0006"

Notes: Allestimations arewithconstantandtrend.d(..) is firstdifference. ratthe end of each variableis indicating variableat constant prices. * and ** indicatesignificancelevels at 1 per cent and 5 per cent respectively. ADFtest and PP test statisticshave been estimatedwithconstantand trend.Ng-Perron is based on HAC corrected variance(Spectral (MZtGLS) GLS-detrended values are as follows: AR)and asymptoticcritical SignificanceLevel (Per Cent) 1 5 10 Intercept -2.58 -1.98 -1.62 and Trend Intercept -3.42 -2.91 -2.62

Table 13: Computation of Income Elasticity of Private Expenditure on Health Coefficient Constant coefficient Elasticity AdjustedR2 F-Statistics -7.1816 1.4286 0.8520 242.7024 t-value ,-5.1137 8.8097

Note:Standard errors andt-statisticsare based on Newey-WestHAC Standard Errors and Covariance(lag truncation = 3).


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These variables series of I(1) can be stationary. non-stationary variables.Cointegration are describedas cointegrated analysis in also helps us to performa analysisof long-runrelationships timeseries,aftertestingunit a set of variables. Fora multivariate test shouldbe carried out a cointegration rootsforeachvariable, to ensurethat the regressionmodel is not spurious. was firstintroduced The conceptof cointegration by Granger a standard tool in the time become has since then and (1981), series analysis of economic data. An economic relationship such exists, however, when two I(1) series are cointegrated, thata linear combinationof the series is stationaryand two seriesshare a common stochastictrend.Several studies have estimated the relationshipbetween health expendituresand on the incomeusing this approach. The lack of cointegration, other hand, would imply that the series could wanderapart To test whether withouthavingany fundamental relationship. withPCI,we PHEhas a long-term andequilibrium relationship betweenthese two variablesand test estimatethe relationship for theircointegration. The Granger theorem also representation can be shows that any cointegrating relationship expressedas an equilibrium correctionmodel (ECM). tests: The concept of cointegrationis used to Cointegration whetherthereis a long runequilibrium determine relationship betweenprivateexpenditure andhealthand income.Engle and as EG, have developed a Granger(1987), hereafter-referred twovariables of thesameorder whether simplemethod integrated arecointegrated. As per this methodwe firstdetermine whether the two variables have integrationof the same order. The test is to be appliedonly for the same orderincointegration series.GiventhatbothPHEandPCIseriesareintegrated tegrated series of orderone, the long-runrelationship:
In(PHE,) = pfo+ pln( PCI )+ e,

alternative rank than zeroforthepresence of acointegrating greater vector.Table 15 presentsthese results. In additionto the residual-based tests, we also considertwo likelihood-based test statistics using Johansen method. Table 15 reportsthe Johansen"trace" statistic,which tests the null hypothesisthat the system in log (PHE) and log (PCI) contains no cointegrating relationshipagainst the alternative one more that or vectorsarepresent in cointegrating hypothesis the system.In constructing these tests, we assumethatthe data are trending and that a constantis presentin the cointegrating vector. Trace test and Max-eigenvalue tests indicates no at the 0.05 level. cointegration The reported resultsbasedon EG methodand Johansen test nullof nocointegration forPHEandPCI. Thecointegration suggest tests clearly do not reject the null hypothesis.Based on the unitrootand cointegration tests, the PHE and income have an of orderone, i e, I(1) butthese time seriesvariables integration are not cointegrated. Since the two series are not cointegrated theseresultsmaybe unreliable. Since we use a long-timeseries dataof 43 years,we maynotbe ableto rejectthenullhypotheses of unit root and no-cointegration becauseof structural breaks in the series. We examinethis in next section. Structural Break Analysis The presenceof structural breaksin time series have implicationsfor the unitroot tests, as they can be mistaken for noncharacteristic of time series. In the of stationary presence structuralbreaksthe power of unit root tests to rejectthe null hyto Perron theability [Perron 1989].According pothesisdecreases of theusualADFandPPunitrootteststo reject thenullhypothesis
Table 14: Test of Cointegration Based on EG Method
-3.26 Augmented Dickey-Fuller test statistic (Prob0.090*) t-statistic Phillips-Perron -1.53 (Prob0.805) Test critical values* 1 per cent level -4.24 5 per cent level -3.54 10 per cent level -3.20 1 per cent level -4.19 5 per cent level -3.52 10 per cent level -3.19 critical values** Asymptotic 1 per cent level -3.42 5 per cent level -2.91 10 per cent level -2.62

will be meaningful only if the erroret is free of unitroot. The thedeviations fromthe long-term error relationship. etrepresents If these deviationsare stationarythen the two series have a and estimationis not spurious.Altercointegrated relationship natively,one can also obtainregressionresidualsfor unit root tests obtainedfrom a cointegrating equationwhich includesa trendvariable.By rejectingthe null hypothesisof unit root on the residuals,the variablesin the regressionequationare said to be cointegrated. Table 13 presentsthe regressionresultsof the cointegrated model. The regressionestimatessuggest that the income elasticity of privateexpenditures in India is 1.43. This implies that for every I per cent increasein PCI the per capitaPHE increases by 1.43 per cent. These resultsare acceptableif the errorterm of this regressiondoes not have unit root. We use an EG residual based test to examine this. Table 14 presentsthese results. Table 14 presentsthe values of the t-statistics thatwe obtain from applyingADF tests to the fitted residualsof the above We alsopresent thePP andNP (MZt teststatistics GLS) equation. to test the unitroots of these residuals.The EG resultssuggest that PCI and PHE arenot cointegrated. The resultscannotbe used as they may be spurious. Since the EG residualbasedtest has low power, it is possible that this test may fail to detect when it is actually present.This may happen cointegration, becauseit is difficultto rejecta unit root in the residualdue to the low power of the unit root test. Thus, we also used the Johansen rankbased test to find cointegration. In this test we examinethe null rankof zero for no cointegration againstthe

test statistics Ng-Perron MZt statistic MZt statistic Notes:

-1.44 -2.19

MacKinnon (1996) one-sided p-values. ** Ng-Perron(2001, Table 1). All computationsare based on the inclusion of constantandlinear trendsincomputations. Theselection of lag lengthis based on SICcriterion and is 6.

Table 15: CointegrationTest Using Johansen Method

Unrestricted rank test (trace) cointegration number of coefficients Hypothesised None Atmost 1 Trace 5 PerCent Prob** Statistic Critical Value 12.02 5.83 25.87 12.52 0.8104 0.4822

Unrestricted rank test (maximum cointegration eigenvalue) number of coefficients Eigen Max-Eigen0.05 Critical Prob** Hypothesised value Statistic Value None Atmost 1 0.14 0.13 6.19 5.83 19.39 12.52 0.9471 0.4822

Notes: ** MacKinnon-Haug-Michelis (1999) p-values. Allcomputations arebased on linear deterministic trend assumption.


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when the stationaryalternativehypothesis is true is indeed In fact, the power of these tests reduces.There compromised. have been some attemptsto providealternative unit root tests in the presenceof structural breaks.Perron suggestsa modified versionof the Dickey-Fuller unitroottest by includingdummy variablesto deal with one exogenous breakpoint. This break point is provided exogenously in Perron (augmentedtype) Test.Lee and Amsler (1995) have also developed Lagrange (LM)basedtest assuminga given breakpoint.Later Multiplier of on this issue evolved towardsthe development on, research test modifications allowing for endogenously determinate breakpoints.The Zivot and Andrews(1992) minimumtest is most widely used to select the break the endogenous procedure pointwhen the t-statistictestingthe null of a unit root is at its researchers haveraisedthepossibility minimum value.Recently, of the existence of more than one break point in economic timeseries [Lumsdaine and Papell 1999]. It is possible to test for two structural breaksin a series [Lee and Strazicich1999c]. In this paperwe focus on the analysis of unit root with one structural break. Thereare threestructural breakmodels developedin Perron (1989). Theseare:(i) the modelallowingfor a one-timechange in level, termedas crashmodel (CM);(ii) the changingmodel whichconsidersa suddenchangein slope of the trendfunction (TM);and (iii) a thirdmodel that allows for changes in level and trend, called break-trend(BT) model. Since the third the changingmodel, only the CM and BT modelincorporates models are takeninto accountin this paper.Based on Perron of these two modelscan be constructed (1989), the framework as follows: In the above specificationDUt is dummyvariableassuming value 1 for all t>Tband DUMtis takingthe value equal to 1 fort = Tb+ timeof thebreak. 1.Tbis theendogenously determined The methodologysearchesover all possible breakpoints and chooses the breakpointat the minimumvalue of the t-statistic. The above model allows a change in interceptonly. The unit roottestis performed for nullhypothesis that usingthet-statistic a = 1 (a unit root) in the regression.The t-statisticsa is used for testing a = 1, with a break date Tb and truncation lag k. Tbandk aretreated as unknown andaredetermined parameter endogenously. Underthe BT Model both a change in the interceptand the as follows: slope are allowed and is constructed PCIt=y+ 0 DUt + P T + p DTt,+ DUM, +a PCIt, + iti A PCti + Et We apply two tests based on Zivot and Andrews (1992) andLee and Strazicich(1999b) to calculate breakpoint. For eachof them, we admittwo possibilitiesfor the model set up: CM and BT models. As discussed earlier,standard unit root tests do not take into account the existence of break points in the time series while these two tests consider them. The take into account the appropriate programmes automatically Theresults of applying theseprocedures arepresented lag length. in Table 16. The resultsfor CM with a changein the intercept only show an interesting pattern. We are not able to rejectthe null in case of PCI in the Lee and Strazicichmethodwhereasunderthe Zivot and Andrews PCIis significant method, only at 10 percent.FortheBT model we areable to rejectthe unitroot null underboth the methods.
PCI, =y+ODU, +r T+6 DUM, +aPCI,_ + ZiA PCtIi +e,

withthehypothesis We view theseresultsas generally consistent as stationary thatmostof theseriesarebestcharacterised around a breaking meanand/ortrendfunction.The econometric implicationsof this mis-specification are relevantin that,following the structural breakanalysisof PCI and PHE, we can deduce thatthe acceptance of the no-cointegration null hypothesismay be causedby ignoringthe presenceof changesin the long-run Also, it was shownthatthe powerof cointegration relationship. testsreducesif thereis any structural breakin the data[Gregory andHansen1996].Sinceit is difficultto knowsuchbreak points a priori,Gregoryand Hansen (1996) propose a statisticthat to test the null hypothesisof no-cointegration attempts against thealternative witha strulctral break atanunknown cointegration inferenceson point of time. It can lead us to drawappropriate when the parameters ot the cointegrating vector cointegration are not constant.Adoptingthe originalnotationto the case of PHEandPCI,these statisticsarebasedon the estimation of the OLS residualsof the following models:
+E ln(PHE,) = 3po+f3 In(PCI,)+ P32DU, ln(PHE,) = Bo + Ji ln(PC1,)+ P 2DU, +ft3(DU, * In(PCI,))+ v,

wherePHE, andPCIthave been previouslydefined,andwhere DUt is a dummyvariablethattakes the value 1 whenevert > Time of Break(TB) and 0 otherwise. Three different teststatistics areshown.Model Gregory-Hansen (A) allows a level shift in the cointegrating relation,Model(B) relation augmentsmodel (A) with a trendin the cointegrating while model(C) allows for a regimeshift (i e, for the valueof the cointegrating to have changed).In all thesecases parameter we get values of ADF*, Zt* and Za* The distribution of these statisticsis derivedin Gregoryand Hansen(1996), where the asymptoticcritical values are also tabulated. Thus, these statisticsallow us to test for the noncointegration null hypothesis when the parametersof the cointegration relationship may change across the sample.All these aspectswill play a crucialrole in the following section, where we analyse the relationship betweenprivatehealthcare and the GDP of India. expenditure
Results of Hansen test: By adopting the test in Gregory and

Hansen(1996) we get the ADF*, Za* and Zt* values with the break points.Herewe see thatADF*,Za*andZt* aresignificant at 1 per cent. So we can say thatwith the normalcointegration tests which take the null of no cointegration against the we do not find any cointegration but when we cointegration, consider structural breakwe findevidenceof cointegration. This has important It means that the two series after implications. breaksarecointegrated andthere takinginto accountstructural is a long-termrelationship in the PCI and privatehealthcare expenditure.
Table 16: Unit Root under StructuralBreak Based on Two Methods of Endogenously Determined Breaks
Method andvariables Tb CrashModel Break-trend Model lag (k) t-statistics Tb lag (k) t-statistics 7 4 6 8 -5.47' -3.68' -3.92" -2.75 1998 1982 1983 1981 7 0 6 8 -4.76 -4.05" -5.70* -4.33*

Zivot andAndrews Model PHE 1987 PCI 1992 Lee and Strazicich Model PHE 1998 PCI 1997

Note: Significancelevel: * 1 per cent, **5 per cent and ***10 per cent.

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Basedon theresultsobtained the structural analysis also suggests elasticity of health expenditure when afterincorporating breakswe estimatethe relationship betweenPHE and PCI and GSDP changes is 0.68, which suggest that for every one per cent estimateelasticity using the following models: increase in state per capita income public healthcareexpenditure
ln(PHE,) = Po + fplln(PCI) + p2DU, + &

ln(PHE,)= Po+ f13 ln(PCI,)+ p2DU, + /3(DU, ln(PCI,))+v, Intheaboveequation, Another /3 willgive theelasticity. important to the pointhereis thatthe dummyvariableis chosenaccording break asrecommended pointsuggested byZt*statistic byHansen. Table 17 presents these results.These resultsarebasedon fully modified Whena traditional OLSis implemented OLSestimates. withnon-stationary teststatistics, variables, beingbiased,cannot be interpreted in the usual way. Generallythe asymptotic distributions of theOLSestimator involvestheunitrootdistribution and it is also non-standard; becauseof which inferenceson /3 in usual the OLS regressionswill be invalid. the t-tests using The Phillips-Hansen methodologycorrectsthese test statistics by suggestingfully modified usinga semi-parametric procedure leastsquares method. Thisparticular method (FM-OLS) regression is appropriate in situationsof cointegrating regressions.The method modifies least squares to account for serial in the regressors correlation effects andfor the endogeneity that resultfrom the existence of a cointegrating The relationship. modelalso providesestimateswhenthereis driftin independent variables. The regressions resultsafterintroducing the structural breaks andregime inModel 1 shiftssuggestthat variables dummy dummy variables (withlevel shiftonly) andbothdummyandinteraction in Model2 aresignificant. The statistical of dummy significance variablein both models also providesevidence in favourof a structural break.The evidencealso suggeststhatthe long-term betweenincomeandPHEexhibitsas structural break relationship andtherefore thereis no stablerelationship betweenincomeand PHEacrossthesampleperiod1961to 2003. Theresults,without break,would be distortedand raise recognisingthe structural about thevalidityof theconclusions. Table18provides questions estimatesof elasticitycoefficients which are 2.19 in Model 1 and 1.95 in Model 2 and both these coefficientsare significant atthe 1percentlevel.Theresultsindicate anincrease in elasticity from 1.39 estimates based on fully modified OLS after the introduction of dummyvariables for a structural break.Because of the significanceof both dummyvariables,we select Model 2 forthepurpose of ourestimation to whichtheincome according elasticity of PHE is 1.95. This elasticity is also statistically differentfrom 1. We have presentedresults which suggest that In(PHE)and are best characterised as stationary In(PCI) processesarounda trend function. Wealsofindthat theseseriesareconsistent breaking withcointegrated andafterintroducing the strucrepresentation turalbreaksthe two series are cointegrated.

has increased by around 0.68 per cent. A spending of less than 1 per cent of GDP on public health is not only dismally low but is also mostly expenditure on staff salaries, leaving little or nothing for facilities, drugs and other consumables. This also poses issues of efficient and effective utilisation of a large existing network of public healthcarefacilities. Public healthcare financing also poses challenges of maintaining adequate forward and backward linkages through a referralsystem, as facilities in the periphery would be most affected by less allocation of resources. This is evident as one observes that secondary and tertiary care facilities are over burdened and have become less manageable. This study suggests that PHE has grown substantially faster than real incomes. For each 1 per cent increase in real PCI, the real per capita expenditure on health has gone up by 1.95 per cent. During the last decade PHE has grown by 18 per cent per annum in nominal terms and about 11 per cent in real terms. The main concerns emerging from these findings are as follows: Financing mechanism and provider payment system: The way healthcare expenditures are financed has importantimplications for the health delivery system. For example, insurance coverage for healthcare expenditure is very limited in India. About 4 to 5 per cent of total health expenditure is reimbursable under any insurance or reimbursement schemes. Studies have shown that in the absence of reimbursement mechanisms, people borrow substantially to finance healthcare. In some cases, borrowing has been as high as their annual incomes. With relatively large amount out-of-pocket costs incurred by households, it is Table 17: Hansen Test for StructuralBreak in Case of Regime Shift
ADFTest C C/T C/S With regimeshift Test (Zt) Phillips C C/T C/S With regimeshift Test (Za) Phillips C C/T C/S With regimeshift t-statistic -4.1434 -4.8425 -4.0063 Zt -3.1808 -3.0987 -3.4106 Za -18.4592 -18.4000 -19.4012 BreakPoint(ADF) 0.3023 0.4884 0.3023 break point(Zt) 0.6279 0.8605 0.6512 breakpoint(Za) 0.6279 0.8605 0.6512 ARlag 6.000 6.000 6.000

Table 18: Fully ModifiedOLS Estimates of Relationship Between PHEand PCIwith StructuralBreaks
Variables Model 0 Model1 2 Model Co- t-Statistic Co- t-Statistic Co- t-Statistic efficient efficient efficient -6.82* 1.39' 55.84 17.27 -8.32 -13.69' 11.82 14.90 2.19' 16.30 -0.55' -6.83 128.18* 78.38' -11.61' 1.95' -6.88' 0.70* 88.61 36.80' -8.61 12.47 -2.96 2.72

V Discussion
The analysisof public healthcare expenditure suggests that stategovernments have the targetof allocatingonly about0.43 andmedical care.Thisdoesnotinclude percentof GSDPtohealth the allocations receivedundercentrallysponsored programmes such as family welfare.Given this level of spendingat current levels and the fiscal positionof state governments, the goal of 2 to 3 percent of GDP on healthlooks ambitious. The spending

Constant In(PHE) Dummy In(PHE)*Dummy Waldstatistic (X2) Waldstatistic (X2)@

Notes: Estimatesare based on Fully Modified Estimatesusing Phillips-Hansen Parzenweightsand zero truncation lag. Waldstatisticwithout and tests whetherall estimated any restrictions coefficientstogetherare significantly different fromzero. @ Wald statistic is with one restriction: = 1. Coefficientof In(PHE) at 1 per cent level. *statistically significant


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Figure 5: Medical Equipment Imports

(in Rs million)


c120000 10000C u) 80000


perceivedbetterqualitycare in the privatehealthcare systemis towards the profitoriented, makingpeopleincreasinly receptive "fee-for-service" privatesector.Privatehouseholdexpenditure is predominant in curativeprimary care, which is about46 per centof totalhealthexpenditure. andtertiary Secondary (hospital) care accounts for 27 per cent of the total. Although direct treatment costs in most public hospitalsare largelysubsidised, households haveto bearsubstantial costs for purchase of medicines so that illnesses impose a heavy burdenon the poor. Therefore,there is an urgentneed for increasinggovernment fundingin providinghealthservices.[3 Email:rbhat@iimahd.ernet.in

40000. 20000
) 0C 0)





C a


s )




Abel-Smith, B (1963): 'Paying for Health Services', World Health Organisation, Geneva, Public Health Papers No 17. - (1967): 'An InternationalStudy of Health Expenditure'. World Health Organisation, Geneva, Public Health Papers No 32. Arellano,M, S Bond (1991): 'Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to EmploymentEquations', Review of Economic Studies 58, pp 277-97. Arellano, M, O Bover (1995): 'AnotherLook at the Instrumental-.Variable Estimationof Error-Components Models', Journal of Econometrics68, pp 29-5 1. Bhat, Ramesh (1993): 'The Private/PublicMix of Healthcare in India', Health Policy and Planning, 8(1), pp 43-56. - (1996): 'Regulationof the Private Health Sector in India', International Journal of Health Planning and Management, Vol 11, pp 253-74. Di MatteoL, R Di Matteo(1998): 'Evidenceon the Determinants of Canadian Provincial GovernmentHealth Expenditures:1965-1991', Journal of Health Economics, 17, pp 211-28. A Household Duggal, Ravi and SuchethaAmin (1989): 'Cost of Healthcare: Survey in an Indian District'. Foundationfor Research in Community Health, Mumbai. Duggal, Ravi (1996): 'HealthSector Financingin the Context of Women's Health', March, ISST Occasional Paper No 4/96. Engle, R F, C W J Granger(1987): 'Cointegrationand ErrorCorrection Estimationand Testing', Econometrica,55, pp 251-76. Representation, Gerdtham,U G, M Lothgren (2000): 'On Stationarityand Cointegration of International Health Expenditure and GNP', Journal of Health Economics, 19, pp 461-75. Getzen, T (2000): 'HealthcareIs an Individual Necessity and a National Luxury: Applying Multilevel Decision Models to the Analysis of Healthcare Expenditure,Journal of Health Economics, 19, pp 259-70. GoI (1946): Health Survey and Development CommitteeReport (4 vols), Bhore committee, Governmentof India, New Delhi. Granger, C W J and P Newbold (1974): 'Spurious Regressions in Econometrics',Journal of Econometrics, 2, pp 111-20. Granger,C W J (1981): 'Some Propertiesof Time Series Data and Their Use in EconometricModel Specification'.Journalof Econometrics,28, pp 121-30. Greene, William (2003): EconometricAnalysis, Prentice Hall, New York. Gregory, A W and B E Hansen (1996): 'Residual-basedTests for Cointegrationin Models with Regime Shifts', Journalof Econometrics70, pp 99-126. Hansen, Paul, and Alan King (1996): 'The Determinantsof Healthcare A Cointegration Expenditure: Approach',Journalof HealthEconomics, 15, pp 127-37. Hitris, T and J Posnett (1992): 'The Determinantsand Effects of Health Expendituresin Developed Countries',Journal of Health Economics, 11, pp 173-81. Hsiao, C (1985a): 'Benefits and Limitationsof Panel Data', Econometric Review, 4, pp 121-74. - ( 1995): 'PanelAnalysisforMetricData',Handbook Statistical of Modelling in the Social and Behavioural Sciences, G Arminger, C C Clogg, MZSobel (eds). Plenum, pp 361-400.


to the publichealthsystemandthe Dwindling financing support Economicand PoliticalWeekly January 7, 2006

debatable whether people are getting value for their money, especially in catastrophic illnesses where the financial burden is high. Production function of private heath services delivery system: Various concerns about the growth of the private sector pertain to quality and cost of care, equity and efficiency. Cost concerns arise because, with the growth of the private sector, one is not informed about the scale on which private healthcare services are being produced. Data on the private sector suggests thatmany health facilities are small in size [Bhat 1994]. Given the morbidity and mortality conditions, India will certainly need more resources to meet the health needs of the population. However, without any regulation and monitoring of the performance of private sector health spending, it is possible that additional income buys costlier treatments at the margin, which produces very little impact on health outcomes. This to some extent gets reflected by the high income elasticity of PHE. Newhouse suggests the high elasticity may imply that people do not buy "cure"but buy "care".It also diverts resources from more importanthealth needs. The high expenditure may be also driven by the higher investments in technology. The data on medical equipment imports during the last 13 years shows an increase of about 25 per cent per annum (Figure 5). Demographic trends and epidemiological transition: Due to the majordemographic and epidemiological transition in the second half of the 20th century, India's middle income group is a vast base of around 250 million. The proportion of households in the low income group has declined from 58.8 per cent in 1990, to 49 per cent in 1996 and the middle and higher income-group has increased from 14 per cent to 20 per cent. The greater population in the age group of 15-60 years, altered life expectancy, increasedburdenof non-communicable diseases along with of variouscommunicable diseases have further periodicrecurrence burdened the ailing health system of India. Dwindling financial support to public health system: India has created a huge system of public health service delivery but more than 60 per cent of the health budget is spent in the recurring costs of staff salary. Social sector allocations are almost all absorbed by staffing costs. Little remains for capital investment and maintenance of essential infrastructure. Governmental resource constraint and the compelling need for upgrading infrastructure,together pave the way for private sector growth.


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- (2000): 'To Pool or Not to Pool Panel Data', Panel Data Econometrics: Future Directions, J Krishnakumar, E Ronchetti (eds), Elsevier, Amsterdam,pp 181-98. Im, K S, M H Pesaran,Y Shin (1997): Testingfor UnitRootin Heterogeneous Panels, Departmentof Applied Economics, University of Cambridge, Mimeo. IIM (1987): 'Study of HealthcareFinancing in India', Indian Instituteof Management, Ahmedabad. of the USA AggregateHealthcare G (2000): 'On the Determination Karatzas, Expenditure',Applied Economics 32, pp 1085-99. Lee J, Amsler C (1995): 'An LM Test for a Unit Root in the Presence of a StructuralChange', Econometric Theory, June. Lee J. Strazicich M (1999b): 'Minimum LM Unit Root Tests', Working Paper, University of Central Florida. - (1999c): 'Minimum LM Unit Root Test with Two StructuralBreaks', WorkingPaper, University of Central Florida. Lumsdaine, R L, D H Papell (1997): 'Multiple Trend Breaks and the Unit Root Hypothesis', The Review of Economics and Statistics, 79, pp 212-18. Maddala,G S, S Wu (1999): 'A ComparativeStudy of Unit Root Tests with Panel Data and a New Simple Test', OxfordBulletin of Economicsand Statistics, 61, pp 631-52. Mahal,Ajay(2000a): 'Diet-linkedChronicIllnessin India,1995-96:Estimates and Economic Consequences', Draft, National Council for Applied Economic Research, New Delhi. - (2000b): 'Equity Implications of Private Health Insurancein India: A Model', National Council of Applied Economic Research,New Delhi. Manning,W et al (1987): 'Health Insuranceand the Demand for Medical Care Evidence from a Randomised Experiment'.American Economlic Review, 77(3), pp 251-77. McCoskey, S K, T M Selden (1998): 'HealthcareExpendituresand GDP:

Panel Data Unit Root Test Results', Journal of Health Economics, 17, pp 369-76. McLaughlin,C (1987): 'HMO Growth and Hospital Expenses and Use: A Simultaneous-Equations Approach', Health Services Research, 22(2), pp 183-202. Nandraj, S, R Duggal (1996): 'Physical Standardsin the Private Health Centre for Enquiryinto Sector: A Case Study of Rural Maharashtra', Health and Allied Themes, Mumbai. Newhouse, J P (1977): 'MedicareExpenditure:A Cross-nationalSurvey'. Journal of Human Resources, 12, pp 115-25. Ng, S, P Perron (2001): 'Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power', Econometrica, 69, pp 1519-54. Perron,P (1989): 'The GreatCrash,the Oil Price Shock and the Unit Root Hypothesis', Econometrica 57, pp 1361-401. Phillips,P C B (1986): 'Understanding SpuriousRegressionsin Economics', Journal of Econometrics, 33, pp 311-40. Phillips, P, B Hansen (1990): 'Statistical Inference in Instrumental VariablesRegressionwith I (1) Processes', Reviewof EconomicStudies, 57, pp 99-125. Selvaraju V (2000): Public Expenditureson Health in India, mimeo as backgroundto NCAER. of andExpenditure on Healthcare Visaria,PandAGumber(1994): 'Utilisation in India: 1986-87', Gujarat Institute of Development Research. Gota, Gujarat. Yesudian C A K (1990): Utilisation Pattern of Health Services and Its Implicationsfor Urban Health Policy, Takemi Programmein International Health, HarvardSchool of Public Health. Zivot, E, D W K Andrews (1992): 'FurtherEvidence on the GreatCrash, the Oil Price Shock and the Unit Root Hypothesis', Journal of Business and Economic Statistics, 10, pp 251-70.

October29, 2005
Development Effectiveness through Gender Mainstreaming:Gender Equality and Poverty Reduction in South Asia Women's Rights to Land and Assets: Experience of Mainstreaming Gender in Development Projects Is Microfinancea 'Magic Bullet' for Women's Empowerment?: Analysis of Findings from South Asia Gender Indicatorsof Equality, Inclusion and Poverty Reduction: Measuring Programme/Project Effectiveness Human Security and Gender Violence Women's Agency in Peace Building:Gender Relations in Post-Conflict Reconstruction Women in Governance in South Asia - Govind Kelkar - Nitya Rao - Naila Kabeer - Meena Acharya, Puspa Ghimire - Radhika Coomaraswamy - Rita Manchanda - Gail Omvedt

The Review of Women's Studies appears twice yearly as a supplement to the last issues of Apriland October. Earlier issues have focused on: Gender in Medical Education (April2005); Gender Budgeting (October 2004); Women, Workand Family (April2004); New Challenges (October 2003); Women, Work, Markets (October 2002); Women and Education (April 2002); Women: Security and Well-Being (October 2001); Women and Philosophy (April2001); Reservations and Women's Movement (October 2000); Women, Censorship and Silence (April2000); Women and Ageing (October 1999); Gender Inequities: Focus on Tamil Nadu (April 1999). For copies write to CirculationManager Economic and Political Weekly HitkariHouse, 284, Shahid Bhagatsingh Road, Mumbai400 001 email: circulation@epw.org.in


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