Original Papers

Eur J Health Econom 2006 7:718 DOI 10.1007/s10198-005-0336-8 Published online: 21. January 2006 Springer Medizin Verlag 2006

John Nixon1 Philippe Ulmann2

1 Centre for Reviews and Dissemination, University of York, UK 2 Chair of Economics and Management of Health Services,

Conservatoire National des Arts et Mtiers, Paris, France

The relationship between health care expenditure and health outcomes

Evidence and caveats for a causal link

vidence confirms steady trends in industrialised countries for improved health outcomes and for increasing health expenditure. In the countries of the European Union (EU) between 1960 and 1995, for example, the average infant mortality rate fell from 3.3 to 0.6 deaths per 1,000 live births; average life expectancy at birth for females rose from 72.5 to 80 years; average male life expectancy at birth rose from 67.6 to 73.6 years; whilst over the same period total health expenditure as a share of gross domestic product (GDP) rose from 3.4 to 7.7 [29]. However, the evidence for a causal link between health care expenditure and health outcomes remains elusive as problems emerge from the difficulty of isolating the contribution of the health service input as a determinant of health status output... which frustrates attempts to measure the overall effectiveness and efficiency of health care [13]. Consequently in comparing trends within a country over time (e.g. for longevity) there is no experimental control group providing comparable data in the absence of health services. Moreover, in most cases an individuals visit to a health professional for treatment (e.g. a dentist or a chiropodist) involves health care expenditure but does not necessarily result in extending his or her life span; it simply brings some improvement in the individuals feeling of well being. This is one of the reasons for the introduc-

tion of utility measurements in health care to derive qualitative outcome measures such as the quality-adjusted life year (QALY) and healthy years equivalent (HYE) [26] and the Health Utilities Index (HUI) [20], which, however, involve a number of unresolved issues associated with definitions, measurements and practical use. Therefore relatively few studies have been successful in finding a link between health care expenditure and health outcomes, as other factors affecting health outcomes such as diet, life-style and environment are often taken to be the principal factors affecting health outcomes, and particularly life expectancy. The aim of this study is to examine this relationship further. The contribution begins with an overview of commonly adopted approaches by researchers in this field of study, followed by a review and summary of the findings of key studies in this area of research. We then describe the methods that we have adopted to undertake our own empirical analysis of the relationship between total health care expenditure and health outcomes in the countries of the EU over the period 19801995, using life expectancy (females and males) and infant mortality as the dependent variables. The results are then presented, followed by a discussion of the caveats and limitations of the work and previous studies included in the review, and how future studies might be improved.

Methodological approaches
In this field of enquiry it is possible to distinguish two distinctive approaches that have been adopted by other researchers [44]. The first approach is grounded in the work of Grossmans [14] human capital theory at the level of the individual, which regards health as a commodity which the individual will wish to consume and maximise, subject to his budget constraints, in conjunction with a number of endogenous and exogenous variables or characteristics which have an impact on an individuals health. Within this model, income and educational level play prominent roles as explanatory variables. Grossmans household production function model of consumer behaviour was further developed to account for the gap between health and medical care as one of the many inputs into its production. The investment model of demand deals with a theoretical and empirical investigation of the demand for the commodity good health [15]. The model essentially regards health as a capital good that is inherited and depreciates or deteriorates over time. The theory posits that investment in health is a process in which medical care is combined with other relevant factors to produce new health, which, in part, offsets the process of deterioration in health stock. The positive correlation between education and the health of an individual has been confirmed in many subsequent studies [15].
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The second approach, adopted in this study, considers health as a production function which is addressed using aggregate or macro-level data. The basic tenets of this approach are that health can be viewed as an output, say of a health care system, which is influenced by the inputs to that system. In particular researchers adopting this approach wish to investigate the relationship between health care expenditure, or medical care resources as inputs, and health outcomes as the output of that system. Furthermore, this issue has become a central question in the context of health care cost-containment in most developed countries in the past few decades. However, it is the case that the distinction between these approaches has become somewhat blurred, and there is a degree of overlap as many of the variables employed in the two approaches are the same, and they are both categorised as production functions. For the purposes of our empirical analysis we focus our attention on the second approach due to the adoption of macro-level variables in our production function. Moreover, Arrows impossibility theorem highlights the methological problems in attempting to move from the micro-level to the macro level [2]. This is particularly true in the health sector where many results confirm health as being a luxury good at a macro level, when it is a normal good on a micro-level. Furthermore, analysis of this issue has demonstrated analytically and empirically that considering micro-level results for health policy decision making at the macro-level may be misleading [31]. outcomes. We also, however, examined papers that addressed health in relation to economic growth. (b) Papers presenting empirical results obtained from macroeconometric models. (c) Papers exploring these issues at least for European countries or less specifically OECD countries. (d) Studies based on larger samples, i.e. those including developing or transitional economies, were also considered if they included European/OECD countries in the sample. By adopting this procedure we initially identified 38 potentially relevant papers. On closer examination 22 were deleted either because they did not meet our inclusion criteria, or because different versions of same paper (with marginal differences) existed. We finally retained 16 papers for review/summary. This approach was found to be useful as it facilitated an overview of the methods that have been used, along with a summary of the principal results. For ease of assimilation the relevant data for each study are summarised in . Table 1, which provides details of the dependent variable(s), explanatory variable(s), the countries studied, a brief description of the model, and the principal results of each included study. Whilst we acknowledge the wealth of literature that has examined variations in health outcomes related to income inequality (e.g. [38, 39, 41]), we have not included this type of analysis in the review as it falls outside the scope of this paper. In terms of dependent variables the vast majority of studies utilise mortality rates (age-specific or infant mortality in particular) and/or life expectancy. Life expectancy is used mainly at birth, but several studies assess life expectancy according to gender and at specific ages other than birth (e.g. 40, 69, 80 years). One study [27], however, did use a health utility variable (disability-adjusted life expectancy or DALE) at birth and at age 60 years, as well as potential years of life lost for circulatory disease, cancer and respiratory disease. All studies included some form of health expenditure as one of the dependent variables for the model used, with the exception of Robalino et al. [32], which was retained for interest and comment due to its assessment of the impact of fiscal decentralisation on infant mortality, and Grubaugh and Santerre [16], which used income (and health expenditure as one of the studys dependent variables). Health expenditure as a share of GDP, gross national product (GNP) or per capita health expenditure are commonly used. In addressing problems of poor comparability when using exchange rates, several studies adopted purchasing power parity (PPP) [3, 5, 27, 30] when using health expenditure or income data. Ten of the 15 studies use income as an explanatory variable in addition to health expenditure, but there is a need to acknowledge, as several studies do, that the correlation between these two variables is high [28]. In terms of other diet, socio-economic and life-style explanatory variables it is possible to observe wide variations in the number used (mean 8, range 317). The studies utilising the most extensive number of explanatory variables are Cochrane et al. [8], which used seven health care variables (such as physicians, nurses, beds etc), six dietary consumption variables (including those commonly used in several studies, e.g. alcohol consumption, tobacco, fat intake) and four demographic and economic variables. Berger and Messer [7] used 12 explanatory variables. Some of the chosen explanatory variables also clearly reflect the hypothesis being investigated, as exemplified by the use of private and public splits in health care expenditures [9] and expenditure on pharmaceuticals [3, 22, 27, 34]. To capture population effects a number of studies include an agespecific variable [3, 17, 21, 43] or a population density variable [8, 9, 10]. Some very specific explanatory variables included in the sample are decentralisation coefficient, political rights [32], proportion of white-collar workers [30] and National Health Service (NHS) financing of medical services [21]. When examining the countries that were studied, it can be seen from . Table 1 that the vast majority (ten) studied various combinations of OECD countries. Another three included developed countries or countries in Western Europe, one study included both developing and developed countries, and two studies by the same author analysed the Canadian provinces [9, 10]. It is interesting to note here that these two studies used data with a high degree of homogeneity and consistency,

Previous research
This section provides a review of key studies that have considered the relationship between health expenditure, among other explanatory variables, and health outcomes, using macro-level data. In order to identify potentially suitable studies we first searched for all the potential relevant papers on these topics using the Internet (published articles, working papers, public reports) or articles bibliographic details. Our inclusion criteria were: (a) Papers had to focus mainly on the relationship between health care expenditures and health

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Abstract
which the authors indicate is an important factor in obtaining their results (in favour of a link between health expenditure and health outcomes). Inconsistencies in other datasets, they argue, often contribute to negative findings when exploring such links. It is recognised that the inclusion of the study that examined both developing and developed countries [5] may create problems concerning the comparability of studies, but this study was retained as it offers some insights into other explanatory variables that are relevant to developing countries and factors associated with geographical location. When considering the various modelling techniques that were adopted, it is possible to distinguish a number of features. As would be expected, all studies utilised some form of multivariate regression analysis, with some incorporating lagged variables for data affected by temporal factors [21, 22, 27, 34]. The second relates to the form of data analysis used; ten used panel data sets (time-series cross-sectional), three used cross-sectional data for more than 1 year, and three used cross-sectional data for only a single year. The third point of interest is the transformation of data into logs by several studies to enable the elasticities of significant explanatory variables to be used. In some cases the modelling incorporated shift dummies to account for fixed effects within the sample, for example, in investigating heterogeneity due to country-specific effects [17] or the impact of health care system (NHS or social insurance) [11]. The principal results showed that health expenditure was a significant explanatory variable for at least one health outcome examined in 12 of 16 studies. Five studies found that income was a significant explanatory variable. One study found that fiscal decentralisation leads to a decrease in infant mortality rate [32], and one study did not find health expenditure to be significant when controlling for income [21]. It is interesting to note that all studies that included pharmaceutical expenditure found this aspect of health expenditure to be significant and positive for health outcomes [9, 22, 27, 34]. In terms of life-style variables a number of studies found that smoking [7, 8, 9, 10, 16, 43], alcohol [7, 8, 9, 10, 16, 30] and consumption of fat (or animal products) were significant [5, 7]. In general, the studies reviewed confirmed a worsening impact on health outcomes for negative changes in life-style. When considering health service-type explanatory variables, the number of physicians was found to be significant in three studies [8, 10, 16], although the association was positive for mortality rates in one of these [8]. Length of in-patient stay and number of beds were found to be significant in one other study [3]. Finally, studies with less commonly used explanatory variables found, for example, that living in the tropics is associated with reduced life expectancy [5], and that third-party financing systems have an adverse impact on infant mortality [21], confirmed by Elola et al. [11] who found that NHS systems have better infant mortality rates for similar health care expenditures. The above summary indicates some encouraging time-series results, which led us to rethink the case of cross-country time-series/cross-section research for countries of the EU. We sought to use the best available data and more sophisticated specification and estimations of the relevant functions.
Eur J Health Econom 2006 7:718 DOI 10.1007/s10198-005-0336-8 Springer Medizin Verlag 2006

John Nixon Philippe Ulmann

The relationship between health care expenditure and health outcomes. Evidence and caveats for a causal link
Abstract The relationship between health care expenditure and health outcomes is of interest to policy makers in the light of steady increases in health care spending for most industrialised countries. However, establishing causal relationships is complex because, firstly, health care expenditure is only one of many quantitative and qualitative factors that contribute to health outcomes, and, secondly, measurement of health status is an imperfect process. This study reviews key findings and methodological approaches in this field and reports the results of our own empirical study of countries of the European Union. Our analysis examines life expectancy and infant mortality as the output of the health care system, and various life-style, environmental and occupational factors as inputs. Econometric analyses using a fixed effects model are conducted on a panel data set for the former 15 members of the European Union over the period 19801995. The findings show that increases in health care expenditure are significantly associated with large improvements in infant mortality but only marginally in relation to life expectancy. The findings are generally consistent with those of several previous studies. Caveats and improvements for future research are presented. Keywords Health care expenditure Health outcomes Aggregate data Macro-health

Methods for empirical analysis

The analysis of the relationship between expenditures and health outcomes, as outlined above, starts from the premise that health is the output of an aggregate production function which utilises variables such as health care expenditure, life-style, environment and occupational factors as the inputs. The assumption is that for reasons associated with diminishing returns and the adverse effects of certain variables after an initial positive outcome, the relationship is expected to be nonlinear and non-monotonic. For example, the effects of rising income on health status are assumed to be initially beneficial, but after a certain threshold of income level which affects the life style of an individual they may reverse to become negative, giving rise to a U-shaped function. Similar considerations apply to biological limits and DNA factors. Moreover, in empirical research it is often virtually impossible to take account of the effects of latent variables, associated with improved nutrition

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Table 1

Summary of data and results for previous studies (PYLL potential years of life lost, DALE disability-adjusted life expectancy, PPP purchasing power parity, GDP gross domestic product, GNP gross national product, GLS generalised least squares, IMR infant mortality rate)
Reference Babazono and Hillman [3] Dependent variable(s) (outputs) Perinatal mortality, infant mortality, male life expectancy at birth, female life expectancy at birth, male life expectancy at 80 years, female life expectancy at 80 years. Explanatory variables (inputs) Total per capita health care spending; public per capita health care spending (PPP); in-patient beds per 1,000 population; admissions per 100 population; average length of in-patient stay; number of physicians per 1,000 population; physician contacts per capita; pharmaceutical expenditure per capita; non-health care spending per capita (PPP); percentage of population aged over 65 years.

Barlow and Vissandjee [5]

Life expectancy at birth (males, females and combined).

Hypothetical maximum fertility; total fertility rate; daily intake of animal products; access to safe water; per capita health expenditure (PPP and exchange rates); per capita GDP (PPP and exchange rates); proportion of adult population who are literate, urban population as a proportion of total population; proportion of population living in tropics. GDP, health expenditure per capita in U.S.$1990; population aged over 65 years; tobacco consumption, alcohol consumption; fat consumption; female labour force participation rate; proportion of population aged over 25 years with post-secondary education; Gini coefficient; proportion of total health expenditures that are publicly financed; proportion of population eligible for in-patient care benefits under a public health scheme; proportion of population eligible for ambulatory care benefits under a public scheme. Health care (physicians, nurses, acute hospital beds, paedatricians, midwives, GNP spent on health care); dietary consumption; cigarette consumption per capita per annum; alcohol consumption in litres per capita per annum; calories per capita per day; protein per capita per day; fat intake per capita per day; sugar per capita per day; demographic and economic (population density, GNP per capita; education index; intervention index=percentage of health expenditure covered by public expenditure).

Berger and Messer [7]

Mortality rate per 1,000 population.

Cochrane et al. [8]

Age-specific mortality rates (maternal, perinatal, infant, 1-4, 5-14, 15-24, 25-34, 35-44, 45-54, 55-64 years per 10,000 population).

Crmieux et al. [9]

Gender-specific infant mortality; gender-specific life expectancy at birth and at age 65 years.

Public drug spending; private drug spending; non-drug health care spending; per capita income; population density; poverty; alcohol beverages spending; gender-specific tobacco products spending; food and nonalcoholic beverages spending.

Crmieux et al. [10]

Gender-specific infant mortality; gender-specific life expectancy.

Total health care spending (private and public); per capita physicians, per capita income; density (population/area); education level; poverty; alcohol use; tobacco use; nutritional data (meat and fat).

Elola et al. [11]

GDP per capita (U.S.$); health care expenditure per capita (U.S.$); proportion of popInfant mortality rate, PYLL females, PYLL males, life expectancy males, life ulation covered by health care system; public health expenditures as proportion of expectancy, females. total health expenditure; Gini coefficient..

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Countries studied and model description 21 OECD countries. Australia, Luxembourg and Turkey were excluded due to missing data. Data are for 1988. Model: multiple linear regression using stepwise analysis (due to small sample size).

Principal results Number of beds and non-health care spending are significant for perinatal mortality (elasticities 0.52 and 0.48, respectively) and infant mortality (elasticities 0.55 and 0.35, respectively); length of stay is significant for male life expectancy at birth (elasticity=0.6); length of stay (elasticity=0.59) and public health-care spending (elasticity=0.38) are significant for female life expectancy at birth; non-health care spending is significant for male (elasticity=0.5) and female (elasticity=0.73) life expectancy. Conclusion: only female life expectancy at birth is affected by health care expenditure.

76 and 77 developed and developing countries. Data are Per capita income and literacy are strong predictors of life expectancy, their influence obfor 1990. Model: multivariate regression analysis using served on proximal determinants (fertility, nutrition and water). Health expenditure does five-equation model. not impact on life expectancy. Per capita consumption of animal products has an inverted-U relationship with life expectancy, lower fertility is associated with major gains in life expectancy, located in the tropics is associated with reductions in life expectancy 20 OECD countries 1960-1992. Model: regression analysis using panel data and corrected standard errors. Five models are presented. Significant variables (coefficients) in most extensive model are: health expenditure (0.1282), population aged over 65 years (0.3334), tobacco (0.1231), alcohol (0.0477), fat (0.0126), female labour force (0.1226); Gini coefficient (0.096), proportion of population eligible for in-patient care benefits under a public health scheme (0.0821), proportion of population eligible for ambulatory care benefits under a public scheme (0.0224). Seven input variables provide the most explanatory power: physicians (positive association with maternal, perinatal, infant and age group 1524 age group mortality), GNP (negative association in most mortality rates), cigarettes (positive associations for all mortality rates); alcohol (mostly positive associations but negative associations for older age groups); population density (positive association for all but one mortality rate), intervention index (mostly negative associations); sugar consumption (negative associations with all mortality rates). Model explains between 42% (514 age group) and 97% (infant mortality) of variation in mortality rates. Results have some anomalies such as increasing physicians associated with higher mortality rates, sugar intake reduces mortality rates etc. Public drug spending per capita and private drug spending per capita are significant for all health outcomes (elasticities: e.g. 0.108 for male infant mortality, 0.0.143 for female infant mortality, 0.001 for male life expectancy and 0.009 for female life expectancy). Total non-drug health care spending is significant for male infant mortality, (0.51), male life expectancy at birth (0.017) and male life expectancy at age 65 (0.051). Other significant variables (with expected signs) include spending on alcohol and spending on tobacco, spending on food and non-alcoholic beverages, GDP per capita (not for infant mortality), density. Significant regional variations also exist between provinces (higher private drug spending=better health outcomes than public drug spending). If provinces increased drug spending to highest levels, 584 fewer infant deaths would result and over 6 months life expectancy at birth. Health expenditure is significant for all outcomes (elasticities: 0.4 for male infant mortality, 0.6 for female infant mortality, 0.05 for male life expectancy and 0.024 for female life expectancy). Number of physicians is also significant in improving all outcomes. Other significant variables (with expected signs) are: alcohol consumption and percentage of smokers, density=negative impact female life expectancy, poverty=negative impact on infant mortality, meat=positive impact on female life expectancy, increased fat=negative impact on all health outcomes except female life expectancy, higher income=higher life expectancies but not lower infant mortality rates. Social security systems have significantly higher GDP and per capita health expenditures. Health care expenditure explained 32% of variability in PYLL and 37% of life expectancy for females. For GDP the figures were 26% and 23%, respectively. Health care expenditure was a better predictor of infant mortality (R2=0.45) than GDP (R2=0.38). Infant mortality rates would be lower for NHS systems at similar levels of health care expenditure (magnitude 1113%).

18 developed countries. Data used were for 1970, 1969 or 1971. Model: regression analyses of mortality rates on seven variables found to have the greatest explanatory power.

Canadian provinces over the period 19751998. Authors state that data are homogeneous in comparison with those derived from international data sets. Model: cross-sectional time-series GLS for panel data with correction for AR (1) autocorrelation within panels and heteroskedasticity across panels. Canadian provinces are equally weighted.

Canadian provinces over the period 1978-1992. Authors state that data are homogeneous in comparison with those derived from international data sets. Model: aggregate production function using GLS and provincial fixed effects. Analyses given in original values and logs.

17 Western European countries (Portugal excluded). Data are for 1990 or 1991, or most recent available at the time of the study. Data are mean values according to health care system (NHS or social security). Model: regression analysis using dummy variables for health care system type (NHS or social security). Relationship between infant mortality and health expenditure was investigated after controlling for GDP.

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Table 1 (continued)

Summary of data and results for previous studies (PYLL potential years of life lost, DALE disability-adjusted life expectancy, PPP purchasing power parity, GDP gross domestic product, GNP gross national product, GLS generalised least squares, IMR infant mortality rate)
Reference Grubaugh and Rexford [16] Dependent variable(s) (outputs) Infant mortality (health expenditure also assessed but not summarised here). Explanatory variables (inputs) Number of physicians per capita; GDP; population density; real education expenditures per capita; female labour force participation rate; per capita real expenditures of alcohol; per capita real expenditure on tobacco; time trend (for technology effect); country-specific non-system; health care system dummy variable. GDP; proportion of population aged over 65 years; per capita health expenditure.

Hitiris and Posnet [17]

Health expenditure, crude mortality rates

Leu [21]

Age and sex-specific mortality rates of GDP per capita; health expenditure; number of physicians (lagged 10 years) and beds adults; sex-specific post-neonatal mor- (lagged 10 years); education, urbanisation; consumption of alcohol and tobacco; tality (2nd to 12th months after birth). public financing of medical services; NHS financing of medical services; proportion of population aged under 15 years; direct democracy.

Lichtenberg [22]

Life expectancy at birth.

Per capita health care expenditure (private and public); medical innovation (new drugs and pharmaceutical R&D).

Miller and Frech [27]

DALE at birth and at age 60 (1998 1999); life expectancy at birth and at ages 40 and 60 years (19971999); PYLL for circulatory disease, for cancer, and for respiratory disease; cause-specific mortality rates at particular ages: 3554, 5564, 6574, and 75 years (19941996). PYLL per 100,000 persons, aged up to 69 years; all causes except suicides.

FEMALE, indicator variable for a female outcomes measure; GDPPC, gross domestic product per capita in PPP; PHPC pharmaceutical expenditures per capita in PPP; HEPC other health expenditures per capita in PPP; SMOKE, if female=1, the percentage of females aged 15 years or over who smoke; if female=0, the percentage of males aged 15 years or over who smoke; ALCOHOL consumption per capita; ALCOHOL FEMALE, ALCOHOL interaction with FEMALE; OBESITY, proportion of females with high body mass index.

Or [30]

Total health expenditure per capita (PPP); proportion of public expenditure in total health expenditure; GDP per capita (PPP); proportion of white-collar workers in total work force; NOx emissions per capita; alcohol consumption; tobacco consumption expenditure per capita (PPP); fat butter consumption per capita; sugar consumption per capita.

Robalino et al. [32]

Infant mortality ratio.

GDP; decentralisation coefficient; structural indicators (politics rights, corruption, ethnicity); country effect dummy. Gender; age; GDP; pharma exp.; health exp.; behaviour variables (tobacco, butter and vegetables consumption); pollution proxy

Shaw et al. [34]

Life expectancy at different ages (40, 60, 65 years) for men and women in 1997.

Medical expenditure; population aged over 65 years, butter consumption; road acciWolfe and Gabay [43] Gender-specific life expectancy at birth and at age 60 years; infant mor- dents; liver cirrhosis (male and female); tobacco consumption; tality; prenatal mortality rate; medical employment in safe and risky industries. expenditure.

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Countries studied and model description Panel data for 12 OECD countries (U.S. excluded). Data are for 19601987. Model: multiple regression analysis. Actual and predicted performance of the U.S. also analysed using the selected panel and published data for the U.S. 20 OECD countries over 28 years (19601987). Model: regression analyses on three models using linear and log-linear form. Use of country-specific shift dummies based on a pooled sample of cross-section and timeseries data. PPP and exchange rates used.

Principal results Significant (coefficient) variables for infant mortality are: Number of physicians (0.302), GDP (0.386), alcohol (0.099), tobacco (0.145), time trend (0.145). The U.S. infant mortality rate (predicted) was 17.2%, while the actual value was 12.8% if the U.S. possessed the health care system and unobservable non-system structure of the typical OECD country. Model 1 confirms the strong link between health expenditure and GDP (income elasticity of health spending=1.026). Model 2 shows that proportion of age 65 above is significant in explaining health expenditure (elasticity=0.55). Model 3 shows that health expenditure has a negative impact on mortality (elasticity low at 0.08), and both population aged over 65 years (elasticity=0.350) and GDP (elasticity=0.087) have a positive influence on mortality rates. For a given level of health expenditure and GDP the UK has significantly higher mortality rates in the sample used. Only results for health outcomes as dependent variables given here: Variations in adult mortality rates could not be explained by model. For post-neonatal mortality (boys, girls), per capita GDP (0.56, 0.71), education (1.3, 0.62) and public spending (0.09, 0.06) were significant explanatory variables. Health expenditure was not significant when income is controlled for. Third party financing systems may have an adverse influence on post-neonatal mortality rates due to reduced uptake. 10% rise in life expectancy from 69.7 to 76.5 years. Increased health expenditure and drug approvals explain about 100% of observed long-run increase in life expectancy. Cost of medical care per life year gained=$11,000; $1,345 for pharmaceutical R&D. New drugs are more cost-effective in increasing life expectancy Estimations with the model with life expectancy at birth are non-significant (except constant and obesity). For all of the other models with life expectancy at ages 40, at 60, with DALE at birth and DALE at 60 years: pharmaceutical expenditure coefficient is always significant and the other health expenditures never. Effects are higher for women (elasticity from 0.02 for DALE at birth to 0.09 for DALE at 60). With PYLL and mortality, results are different according to the considered pathology. Obesity has also large effects. GDP and other health care expenditures are non- significant in all models except for cancer and respiratory mortality models. Methodology seems non-robust (problems of collinearity stressed by authors), probably pharmaceutical catch most of GDP and other HC expenditure effects. Health expenditure is statistically significant on health for women, in terms of premature death approximate by PYLL (0.18 in log), but non-significant for men. If GDP removed from estimation (high collinearity), both largely significant, and still more for women. Proportion of public health expenditure is significant for both men and women (0.17 and 0.18 respectively). Major contribution to decrease in premature mortality is (respectively for women and men): (a) Proportion of white-collar (capturing education and work): 0.80 (w), 0.75 (m); (b) GDP per capita PPP: 0.34 (w), 0.44 (m); (c) alcohol: +0.20 (w) and +0.16 (m); (d) proportion of pub exp. In total health expenditure: 0.17 for both. Fiscal decentralisation leads to decrease in IMR (decreasing return effects with the GDP level). Elasticities are around 0.33 for richer countries (those with more than U.S.$6,000 per capita). Other coefficient are also significant. Pharmaceutical exp. leads to increase life expectancy at ages 60 and 65 years (elasticities of 0.028 and 0.031, respectively). Per capita GDP important predictor of life expectancy at ages 60 and 65 (elasticities of 0.03 and 0.055 respectively). Estimated coefficients of other health care expenditures are non-significant Increases in medical expenditure lead to improvements in all health outcomes. Negative changes in life-style lead to negative changes in health outcomes and increase medical expenditures. The inclusion of life-style variables must occur in order to determine the positive (beneficial) link between health expenditure and health outcomes. Increase in proportion of population aged 65 or over, and higher occupational risk are associated with higher medical expenditure.

19 OECD countries (not Luxembourg, Iceland, Japan, Portugal and Turkey). Data are for 1974. Model: regression analyses using some lagged variables.

U.S. over the period 19601997. Model: aggregate production function incorporating the geometric lag model and logarithms, corrections for serial correlations. 18 OECD countries. Model: cross-section regression analysis with lagged variables in log-log.

21 OECD countries 19701992. Model: regression analysis with 483 observations using panel data.

67 countries (LDC and OECD) 19701995. Model: regression analysis using panel data. 19 OECD countries; 1980, 1985, 1990, 1997 data. Model: cross-section analysis with lagged variables.

22 OECD countries in years 1960, 1970 and 1980. Data are converted into rates of change. Model: linear structural relations for simultaneous models (model 1=health function of medical expenditure and life-style; model 2=medical expenditure is a function of life-style).

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and better hygiene (e.g. from a decline in water and food-borne diseases, improved water quality and sewage disposable systems, diet, exercise, tobacco and alcohol consumption), which have been suggested as the most important in the determination of health outcomes [25]. Taking account of these caveats and restrictions, we undertook econometric analysis of three dependent variables associated with health outcomes: life expectancy at birth of males (M) and females (F), and infant mortality (I). The chosen explanatory variables, determined by examination of the OECD health data set and in light of the variables commonly applied in previous research (as outlined above), for each of the three equations were: total (per capita) health expenditure (U.S.$ PPP), X; health expenditure as proportion of GDP, Y; number of physicians (per 10,000 head of population), D; number of hospital beds (per 1,000 head of population), B; in-patient admission rate (percentage of population per annum), A; average in-patient length-of-stay in hospital (days per annum), H; population coverage of health care system (percentage), C; unemployment rate, U; alcohol consumption (litres per capita per annum), S; expenditure on tobacco (U.S.$ PPP per capita per annum), T; nutritional characteristics, such as fruit consumption (kilos per capita per annum), F; nutrition (protein, per capita intake per annum), N; and environmental pollution, P (sulphur oxide emission, measured in kilos per capita per annum). It was not possible to obtain certain variables of interest, such as educational attainment for the EU population and actual cigarette consumption (as opposed to the utilised expenditure on cigarettes), a point addressed further in the discussion. The analysis was applied to data of the 15 EU countries of the period 19801995, i.e. 16!15=240 obser vations. Variables and data were obtained from the OECD Health Database [29]. Data were analysed using the econometric software package SHAZAM [42]. The variables identified above are assumed to exert some influence on the dependent variables. However, there may be specific characteristics in each country as well as latent variables, nonspecified or directly quantifiable, which may exert diverging effects on different countries. Therefore in addition to the explanatory variables and the constant term, our model includes a dummy variable for each EU member state (with the United Kingdom taken as the standard and represented by the constant term). After taking account of the expected non-linearities and testing for the specification form (using the box Cox statistics) we have chosen the log-linear functional form. The member-states of the EU make up a specific non-random set and, therefore, the estimation concerns a fixed-effects model subject to stochastic disturbances. Consequently we applied an estimation method that takes account of the openness and interdependence of the EU economies within the common market and corrects econometric problems arising from the nature of the data in the sample by postulating that the pooled set of country data is cross-sectionally correlated and timewise autoregressive [19]. Consistent estimates are derived by subjecting the pooled obser vations to ordinary least squares estimation to calculate the corresponding residuals. These are used to transform the variables, remove the autocorrelation and, by applying generalised least squares, obtain asymptotically efficient estimates of the regression coefficients and their variances. For the estimation the data are transformed, and therefore the usual goodness of fit statistics are inappropriate. We used instead the R2 statistic between observed and predicted values of the dependent variable. nutrition, +N, and pollution, P, are significant determinants of male life expectancy. But there is a statistically significant level of heterogeneity between countries with Sweden the top performer with 74.8 years, and Portugal and Finland the worst with 70.9 years, with an EU average of 72.7 years in 1990. F Female life expectancy: Health expenditure, +X, and number of physicians, +D, are the significant determinants of female life expectancy. There is marked heterogeneity between countries with France the top performer with 80.9 years, and Ireland the worst with 77.5, with an EU average of 79.2 years in 1990. F Infant mortality: Again, health expenditure, X, and number of physicians, D, are the only significant determinants in the reduction in infant mortality. The top performer is Sweden with an infant mortality of 0.6 per thousand, the worst is Portugal with 1.1, with an EU average of 0.8 per thousand in 1990.
. Table 3 presents the contribution of

Results
The plethora of correlated explanatory variables led to problems of multi-collinearity. However, following manual stepwise procedures we eliminated these problems by removing from the set of the explanatory variables and country dummy variables those that provided estimated coefficients of size and sign unacceptable by conventional statistical and economic criteria. The estimates of the resulting parsimonious model are presented in . Table 2. The results suggest the following specific points: F Male life expectancy: Health expenditure, +X, number of physicians, +D,

each explanatory variable to the outcome. With the exception of infant mortality which, during the period under review has been more than halved by the significant contribution of health expenditure, X, and medical care (number of physicians, D), the predominant determinants of both male and female life expectancy are those contained in the constant term, namely the unaccountable salient variables and country-specific characteristics. Therefore the most important conclusion reached by the analysis is that health care expenditure has made a relatively marginal contribution to the improvements in life expectancy in the EU countries over the period of analysis. It has added only 2.6 years to the life expectancy of males and 2.8 years to that of females.

Discussion
As illustrated in this and previous studies, measuring the impact of health expenditure on health outcomes is a complex and difficult issue, which is commonly examined from either a micro- or macro-per-

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Table 2

spective. Our approach has followed the latter, considering health as the output of a health care system, with variations being explained by an array of healthcare inputs in conjunction with a number of life-style and environmental variables. The results of our own empirical study confirm McKeowns [25] conclusions for long-run analyses, namely the relatively weak impact of health care on life expectancy, and research indicating the limited progress of medicine in improving health since the 1980s in developed countries [12, 35, 36]. Nevertheless, the more significant contribution of health care expenditure in improving infant mortality is consistent with the opinion of some health macroeconomists [24]. In terms of life expectancy improvements it is noted that females have gained marginally more than males, and analysis of the OECD health database confirms that females generally maintain a 4- to 6-year advantage over men for the period of analysis. The reasons for this may be more complex than can be dealt with in this study, but in terms of health expenditure it is worth noting that almost all mass screening programmes in developed countries are targetted at women (for example, breast and cervical cancer), additional expenditure is incurred through child bearing-related encounters with health care systems, and because increased expenditure is linked with ageing women would be expected to utilise more health care because of their longevity. Below we highlight some important issues that affect the validity of the results of previous studies as well as our own findings.

Results of the estimations

Life expectancy, males coefficient (t ratio) Intercept Expenditure Physicians Nutrition Pollution Austria Belgium Germany Denmark France Finland Greece Italy Ireland Luxembourg Portugal R2 Buse R2 observed/ predicted Table 3 0.305 (11.693) 0.382 (9.103) 0.763 1.000 4.048 (219.000) 0.022 (8.828) 0.029 (5.533) 0.006 (1.992) 0.007 (5.106) 0.033 (5.346) 0.330 (8.230) 0.357 (10.902) 0.172 (2.731) 0.258 (8.634) 0.255 (5.629) 0.169 (2.486) 0.167 (3.489) 0.255 (11.723) 0.298 (14187) 0.260 (4.030) 0.108 (3.613) 0.145 (3.979) 0.170 (7.706) 0.190 (7.735) 0.733 1.000 0.342 (4.629) 0.250 (6.863) 0.280 (3.399) 0.720 0.726 Life expectancy, females Infant mortality coefficient (t ratio) coefficient (t ratio) 4.120 (427.160) 0.022 (17.081) 0.034 (11.960) 4.348 (23.922) 0.497 (23.466) 0.380 (8.412) 0.148 (2.566) 0.315 (6.367) 0.296 (3.832)

Contributing factors to health outcomes (%) (from: estimated coefficients in Table 2)

Male life expectancy % Health expenditure No. of physicians Nutrition Pollution Constant Term EU average 3.53 2.14 0.74 0.60 94.19 years 2.6 1.6 0.5 0.4 68.4 72.7 Female life expectancy % 3.46 2.46 94.08 years 2.8 1.9 74.5 79.2 Infant mortality % 78.8 27.8 6.6 0.8 rate 0.63 0.22 1.65

Choice of health outcomes

A key issue in studies with our objective is the weak robustness of available macroeconomic indicators that can be used to approximate population health status. Indeed life expectancy and mortality rates, commonly adopted by researchers, can only partially reflect the health status of a population and it is difficult to identify feedbacks and causality links between health expenditures and health outcomes, especially for developed countries. It was felt a priori that infant mortality would be a more representative and reliable health

outcome than life expectancy as the latter is more attributable to factors not related to the health care system, whereas the risks associated with child birth and life in the first year of an infant are reduced by better health care facilities and procedures. This was borne out by our results. In terms of alternative outcome measures, because life expectancy and infant mortality are regarded as fairly crude proxies for health status, which are not very sensitive to changes in health care financing

and delivery systems [18], a number of other measures are being developed. These include amongst others the QALY and HYE as outlined in the Introduction. Linked to this research are a number of instruments that measure health utilities, including the Medical Outcomes Study Short-Form 36 and Sickness Impact Profile which have been adapted for use in other languages and cultures [1]. Although one study included in the review the DALE [27] was used, it should be noted that health status
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measurements are still in the process of development and not yet available for crosscountry comparisons and/or temporal analysis (due to limited estimations). The choice of life expectancy and infant mortality to represent health outcomes by us and other researchers in this field of study is justifiable. Thus, although life expectancy and infant mortality have their limitations, others support the view that population-based measures of health outcome have a crucial place in the overall assessment of health services. They are the ultimate validators of societal achievement in respect of health and as such investment in their study in appropriate detail seems warranted [13]. various systems. In this regard explanatory variables used may include centralised/decentralised systems, Bismarkian/Beveridgian approaches, share of public health expenditure, share of primary care expenditures, primary prevention, educational care expenditures, and the characteristics of health care financing. All Database (HFA), 2005 edition, is available at: http://www.who.dk.]

Developed vs. developing countries

Our results show a marginal but positive effect for health expenditure on the examined health outcomes for developed nations (represented by EU), more so for infant mortality than life expectancy, which is consistent with evidence confirming diminishing returns in the area of health care in developed countries [4, 33]. In contrast, small amounts of health expenditure in developing countries, and even intermediate countries, would almost certainly have a bigger impact. In this regard it would be an informative and interesting exercise to link these results with the research field on growth and health, where this relationship [6] has been stressed by many authors [37, 40] for health expenditure on growth. Baumol [6] showed that due to productivity differences between the services sector (low productivity activities) and the industrial sector (high productivity activities) the value share of the former will increase over time, i.e. a growing part of national income will be spent (and earned) through the low productivity sector, as long as there is a demand for these activities. This well-known phenomenon is called Baumols disease and health services is one of the usual applications of it. Indeed, the demand for health services (derived from the concept of needs) is recognised as unlimited as long as people experience (exogenous) variations in their health status. Moreover, the low productivity character of the health sector is enhanced because the provision of health services is subject to a decreasing returns to scale of 1. It would be an interesting issue to explore new research to validate Baumols disease in health care in the light of the limited impact of care on global health status in developed countries over the past few decades. As previously outlined, it is the case that since the 1980s in the developed countries there have been no crucial innovations in health care, i.e. having a large impact on the population as a whole in these countries, while health care expenditures have increased dramatically.

Data quality
Some early empirical testing of the relationship between health expenditure and health outcomes started with crosssection cross-country estimations which, probably for reasons associated with data heterogeneity and poor quality (e.g. the OECD started collecting and publishing statistical series on health only in the middle 1990s) did not provide any support to the hypothesis of the link between health expenditure and health outcomes. Indeed, previous studies have shown that measuring health outcomes for any country will have its limitations, and these limitations will be further exacerbated by the likelihood that a group of 15 countries (such as the EU over the period of analysis) will have some variations in the way that each country defines and records data [1]. As Macbeth [23] rather pessimistically points out, this diversity of definitions invalidates many comparisons. As indicated above, more recent data would help to increase the reliability of our own analysis. However, in considering the updating of our data panel we noted variations in definitions for the OECD data set between the version we used and newer versions, as well as gaps for some variables/countries. In future work we will explore the possibility of using other sources to update and extend our dataset. By utilising more recent and extended variables in our dataset the present findings can be further explored and validated. [For example, the Summer and Preston 1991 dataset, the Penn World Data (PWD) is available at: http://bized.ac.uk/dataserv/pennhome. htm; the Sachs-Warner dataset is available at: http://www.nuff.ox.ac.uk/Economics/ Growth/datasets.htm; the Easterly-Levine dataset, the Barro-Lee dataset and the World Development Indicators 2001 are available at: http://www.worldbank. org/data; the WHO European Health For

Model mis-specification
Another major difficulty in modelling the relationship between health expenditure and health outcomes is in the potential for model mis-specification. Indeed, our analysis did not capture the impact of lagged effects, which are particularly relevant to life-style variables such as cigarette smoking, alcohol consumption and pollution. Their impact on health outcomes, as shown in previous work, may take a number of years and analyses using lagging and a large panel of data would undoubtedly increase the validity of the results of future studies. We also acknowledge that our chosen model could be better specified in terms of the chosen variables. For example, we could not obtain some variables of interest from the OECD Health Database, such as education attainment and actual consumption of cigarettes in the EU countries. Our use of expenditure of cigarettes may not have captured the true impact of smoking in quantitative terms (although expenditure rather than usage was employed in a number of studies included in the review), and the impact on health of education is well established in Grossman-type studies. Future research therefore should explore the possibility of including these and other non-health variables relevant for this kind of modelling. Furthermore, the results of our review indicate that variables on health care system organisation and financing could be employed further to test the efficiency of

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Hence the phenomenon described by Baumol could explain the large decreasing return (converging towards 0) of health care expenditure on health outcomes since increases in expenditure are largely taken up among services (workforce) growth and the development of expensive products which are applicable to small sub-populations. In contrast, the discovery of new vaccines or large effect drugs, such as penicillin, both producing huge positive externalities, induced increasing returns based on products (not services). One may contemplate that this could be again the case in the next decades with genetics and associated therapies. In summary, in studies that have used aggregate data to explore causal links between health outcomes and explanatory variables such as health expenditure, those associated with the health care system, environmental and life-style, there are some conflicting results and methodological issues that need to be addressed, suggesting more work needs to be done in this area [44]. The above discussion regarding methodology and data sources should, in particular, help to improve future studies.

any lag structure in the explanatory variables, potentially relevant to expenditure on cigarettes, alcohol consumption and environmental influences. Given these caveats, the findings of this study lead to the conclusion that while health care expenditures are among the most important factors in the lowering of infant mortality, they make only a marginal contribution to the improvement of male and female life expectancy. Our results are broadly in line with those of other studies reviewed in this contribution on developed countries, but there are many caveats that need to be considered when interpreting the results of this and other studies, which we have attempted to identify and discuss to the benefit of future studies in this area of research.

Corresponding author
John Nixon Centre for Reviews and Dissemination, University of York, York, YO10 5DD, UK e-mail: jn105@york.ac.uk

Acknowledgements
We express our thanks to Dr. Theo Hitiris, formerly of the Department of Economics and Related Studies, University of York, for his input to the econometric analyses and constructive criticisms in the preparation of this manuscript. Conflict of interest: No information supplied

Conclusions
This study examined the contribution of health care expenditure to health outcomes. The findings show that issues involved here are complicated because, first, health expenditure is only one of many quantitative and qualitative factors that contribute to health outcomes, and, second, health outcomes are also qualitative and quantitative, and only the latter may be assessed by the available statistical and econometric techniques. Taking account of these constraints we searched for the determinants and their effects on three conventional health outcomes, male and female life expectancy at birth and infant mortality, for which quantitative statistical observations are available. In the process we were confronted with the several but expected econometric obstacles and problems but arrived at reasonable results within the constraints found in using OECD health data. In terms of the limitations of our empirical study we acknowledge that the size of the available sample did not permit us to test for the possible existence of

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