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Department of Economics
December 6, 2018
ECON 4750
Fall 2018
Depression diagnoses are on the rise in the United States, with an alarming 33% increase
from 2013 to 2016–which many believe to still be an underestimate.1 This epidemic is not only
an existential crisis, but an economic one. The United States spends billions on mental illness
each year through funding for care, treatment and rehabilitation, as well as compensation for lost
productivity.2 However, this government spending alone does not cover the true societal cost of
mental illness. As outlined in the human capital approach by Rice and Miller, depression limits
societal access to the valuable economic resources a person offers –labor, knowledge, and
experience –limiting not only one’s own productivity, but the productivity of an economy at
educational attainment or a general motivation to learn new skills. It may further create
inefficiencies by preventing workers from accessing jobs optimally suited for their individual
severe cases, depression may cause workers to drop out of the labor force entirely, or even
commit suicide.
Researchers have made several attempts to quantify the economic costs of mental illness.
Rice and Miller estimate that cost to be $147.8 billion in 1990.4 Greenberg et al. stated their
estimate to be $83.1 billion in 2000.5 Finally, WHO researchers estimated the cost to be $925
billion among the world’s 36 largest countries in 2013.6 What is clear is that on every scale,
1
Maggie Fox, “More Teens… Depression Diagnoses…,” NBCNews.
2
Dorothy P. Rice and Leonard S. Miller, “Health Economics and Cost… of Anxiety…,” British Journal of
Psychiatry.
3
Ibid.
4
Ibid.
5
Greenberg et al., “The Economic Burden of Depression…,” Current Neurology and Neuroscience Reports.
6
Chisholm et al., “Scaling-up Treatment of Depression … Investment Analysis,” The Lancet Psychiatry.
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mental illness imposes significant costs to any economy. However, this is not an irreversible
trend, as government spending and other efforts can be employed to fight increasing rates of
depression with appropriate treatment option. The WHO paper comes with a bold claim
How does government spending at the state level affect depression rates? Given the
economic imperative to reduce the prevalence of depression, this is a vital question to answer. In
this paper, we attempt to isolate the effects of government spending through regression analysis
by holding economic, demographic, and physical health variables fixed, utilizing data from the
Substance Abuse and Mental Health Services Administration, U.S. Census Bureau, Center for
Employing data obtained from the federal government, we constructed the following model,
focusing on factors of state economy, general demographics, and disease rates as covariates for
health spending:
This model defines health spending (lhealth) as the log of the per capita amount of state
and local government spending on health initiatives, measured in dollars, measuring its
effect on state-wide depression rates (depression). This spending is controlled for gross
7
Ibid.
8
More information available in the “data” section. All data sources are outlined explicitly under “data sources”.
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of the size of each state’s economy. The variable depression is measured by the percent of
total state population that had a “major depressive episode” within the past year.
between states and increase precision. The age variable represents the median age of
citizens per state. Race effects are accounted through pctwhite and pctblack, representing
a percentage of the total state population who identify as only Caucasian or only African-
of total state population to have attained at least a high school diploma. Financial
security variables are defined through hhincome, representing median household income
by state, and povtyrate, representing poor and poverty rates. Disease prevalence rates
among state populations are captured through heartattack, cancer, and diabetes; the
former two are measured in mortality rates per 100,000, while the latter is measured by
percent of total state population diagnosed. These are included as they are expected to be
correlated with both health spending and depression rates. Though we do run an
the percentage of total Medicaid spending covered by the federal government, we do not
depression. Of course, the ui term accounts for any idiosyncratic (time-varying) error,
while the ai term accounts for unobserved effects that are constant over time, also known
as fixed effects.
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This same research design is again applied with rates for any mental illness used
as the dependent variable, to compare with the depression results, aiding in an accurate
interpretation.
As our data is in panel form, being repeated observations on the same set of
differences (ai) between states, and we therefore utilize a fixed effects (FE) estimation
technique. It is possible the use of FE would provide invalid test statistics, as it imposes
this through the use of clustering to obtain heteroskedasticity and serial-correlation robust
standard errors.
where ̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
𝑑𝑒𝑝𝑟𝑒𝑠𝑠𝑖𝑜𝑛𝑖 is the mean with respect to time, and run pooled OLS. This process
eliminates the intercept β0 as well as ai, as a constant subtracted by its mean is 0. Thus
̃ 𝑖𝑡 = 𝛽1 ℎ𝑒𝑎𝑙𝑡ℎ
𝑑𝑒𝑝𝑟𝑒𝑠𝑠𝑖𝑜𝑛 ̃ 𝑖𝑡 + 𝛽2 𝐺𝑆𝑃
̃𝑖𝑡 + 𝛽3 𝑎𝑔𝑒 ̃ 𝑖𝑡
̃𝑖𝑡 + 𝛽4 𝑝𝑐𝑡𝑤ℎ𝑖𝑡𝑒
̃ 𝑖𝑡 + 𝛽6 𝑝𝑐𝑡𝐻𝑆𝑑𝑖𝑝𝑙𝑜𝑚
+ 𝛽5 𝑝𝑐𝑡𝑏𝑙𝑎𝑐𝑘 ̃ ̃
𝑖𝑡 + 𝛽7 ℎℎ𝑖𝑛𝑐𝑜𝑚𝑒𝑖𝑡
̃ 𝑖𝑡 + 𝑢𝑖𝑡
+ 𝛽11 𝑑𝑖𝑎𝑏𝑒𝑡𝑒𝑠
We assume the model complies with the core Fixed Effects assumptions: that our
model can be expressed linearly, that our cross-sections were randomly sampled, that
there is no perfect multicollinearity, and that the idiosyncratic error (ui) for any given
time period is uncorrelated with the dependent variables in every time period (strict
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However, the strict exogeneity requirement is rather irrational, as it is likely that health
spending is correlated with a number of unobserved factors that affect depression rates,
such as air quality9. If so, this would introduce omitted variable bias (OVB) in the model,
III. Data
As it was not possible to acquire all the data necessary for our analysis from a single
source, we used a combination of independent cross-sections and direct reports from government
agencies for years 2014-2016. Depression rates were obtained from the SAMHSA’s National
Survey on Drug Use and Health. Data on government spending as well as Gross State Product
was collected from US Government Spending (which was in turn acquired from the Census
Bureau). Information was used for both “local” and “state” level spending to correct for
rates were obtained from the CDC and may have been subject to round-off error, as much of the
data was rounded to only one decimal. Data for racial demographics and educational attainment
was not readily available and required additional calculation; these estimates may also be subject
to error. Information for federal spending by state was not available, as such reports were
discontinued in 2011. Instead, we acquired FMAP rates for Medicaid through the Kaiser Family
Foundation (which obtained said information from the Federal Register). Household income,
poor and poverty rates (poverty alone is unavailable), and median age by state were all collected
9
It is possible air quality is negatively correlated with both health spending and depression rates. This would be
difficult to measure, as neither air quality nor population geography are evenly distributed, and air quality is not
time-constant.
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IV. Results
Table 2 displays the results from the FE regression explained above, expressed in
multiple stages. The first regression controls only for Gross State Product, with each subsequent
regression accounting for effects of demographics, education/financial status, disease rates, and
federal Medicaid assistance respectively. A similar method is followed for the purposes of the
From the results in Table 2, the overall depression rate for a state is expected to increase
by approximately 1 percentage point for every 1% increase in health spending. In the full model,
including all covariates, the coefficient on lhealth suggests a 1.06% percentage point increase in
the depression rate for every 1% increase in health spending (Table 2, regression 5). This
coefficient is statistically significant at a .05 level, with a t-statistic of approximately 2.26. This
level of significance holds for every iteration of the regression run in Table 2. In context,
however, hese results are rather severe –a 1% percentage point increase is substantial in a sample
with a mean of 6.92% (Table 1). However, they are rather implausible or at the very least,
counterintuitive: the coefficient is positive, implying that depression rates increase as health
spending increases. A more reasonable interpretation of the results is reverse causality: that
though health spending and depression rates are positively correlated, it is the increase in
depression that causes the increase in spending, not the other way around. By developing a
model with health spending as the dependent variable, explained by depression rates and other
Of some note are the relatively low R2 values, ranging from a maximum of .233, when
accounting for all covariates, down to 0.059, indicating that a substantial amount of the variance
in depression rates is still left unexplained. It is likely that there are a number of unobserved
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effects that were omitted from this model, such as air quality or social attitudes towards
depression, which may lead to OVB.10 Furthermore, it is very likely our controls for physical
illness did not tell the whole story: many other physical conditions may be correlated with both
The findings in Table 3 are somewhat interesting, as there are almost no significant
results for any of the explanatory variables, across all five regression stages. Only in stage 5,
with the addition of the FMAP variable, is there a sign of significance, which falls in line with
the orthodox thinking that health spending holds some negative effect on depression rates.
V. Conclusion
on depression rates. Instead, our results suggested something rather implausible: that state
government health spending increases depression rates. Our findings most likely capture reverse
causality: that depression rates tend to drive government spending. But even if our findings
supported our hypothesis, we would have reason to exert caution while interpreting our results –
government spending and mental health are both complex and multifaceted phenomena, and we
expect there to be many unobserved factors we have not controlled. For future research, it may
be more useful to utilize a difference-in-difference design to test the outcomes of mental health
treatment programs, rather than focusing on macro-level trends in spending and depression rates.
If mental health spending was randomly assigned, rather than driven by mental health itself, the
10
Which may discourage treatment, thereby having a negative correlation with health spending, but a positive
correlation with depression rates,
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References
1. Chisholm, Dan, Kim Sweeny, Peter Sheehan, Bruce Rasmussen, Filip Smit, Pim
Cuijpers, and Shekhar Saxena. "Scaling-up Treatment of Depression and Anxiety: A
Global Return on Investment Analysis." The Lancet Psychiatry3, no. 5 (2016): 415-24.
doi:10.1016/s2215-0366(16)30024-4.
2. Fox, Maggie. "More Teens, Young Adults Get Depression Diagnoses, Insurance Co
Finds." NBCNews. Accessed December 05, 2018.
https://www.nbcnews.com/health/health-news/major-depression-rise-among-everyone-
new-data-shows-n873146.
3. Greenberg, P. E., R. C. Kessler, H. G. Birnbaum, S. A. Leong, S. W. Lowe, P. A.
Berglund, and P. K. Corey-Lisle. "The Economic Burden of Depression in the United
States: How Did It Change between 1990 and 2000?" Current Neurology and
Neuroscience Reports. December 2003. Accessed December 05, 2018.
https://www.ncbi.nlm.nih.gov/pubmed/14728109.
4. Rice, Dorothy P., and Leonard S. Miller. "Health Economics and Cost Implications of
Anxiety and Other Mental Disorders in the United States." British Journal of
Psychiatry173, no. S34 (1998): 4-9. doi:10.1192/s0007125000293458.
Data Sources
Age: https://www.census.gov/data/datasets/2017/demo/popest/state-detail.htm
Household income:
https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-households.html
poverty-people.html
Cancer: https://www.cdc.gov/nchs/pressroom/sosmap/cancer_mortality/cancer.htm
Diabetes: https://www.cdc.gov/brfss/brfssprevalence/index.html
FMAP: https://www.kff.org/medicaid/state-indicator/federal-matching-rate-and-multiplier/
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Number of state 50 50 50 50 50
Table 2: Results from FE regressions of depression rates on health spending
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FMAP -0.0557
(0.0668)
Constant -0.0194 0.131 0.177 0.355** 0.367**
(0.0435) (0.150) (0.142) (0.169) (0.164)
11