Determinants of healthcare spending: a state level analysis

Within the high and rising level of healthcare spending for the US as a whole is substantial variation in spending across states. Yet relatively little attention has been given to the empirical analysis of interstate differences in aggregate healthcare expenditures, and therefore little empirical evidence exists at the state level to guide policymakers. Using data for all 50 states for the year 1998, we estimate an empirical model that includes structural and reduced-form healthcare spending equations and a health production function to assess the significance, size and relative importance of factors that prior research indicates, may play an important role in explaining interstate variation in medical care expenditures, and the main pathways through which they operate. Our results indicate higher levels of healthcare spending for state populations with higher income, less education, fewer uninsured residents, less healthy lifestyles, larger proportion of elderly residents, greater availability of medical care providers and less urbanization. Our findings suggest that the most effective cost containment measures may be those that increase education and promote healthy lifestyles. Not only do these actions lead to reductions in healthcare spending, they also improve the health status of the population, and may help to achieve other important social policy goals.