Modeling Determinants of Health Expenditures in Malaysia: Evidence from Time Series Analysis

The purpose of this paper is to model the determinants of health care expenditures (HCE) and investigate the short-run, long-run equilibrium dynamic causal relationship between health care and income per capita within the time series framework from 1981 to 2014 in Malaysia. For appropriate model specification and forecasting accuracy, different econometric diagnostic tests were applied. Ordinary least square (OLS) method was used to estimate the long run parameters. Long run co-integration was investigated by Auto-Regressive Distributed Lag Model (ARDL) Bound approach, whereas, for causality analysis the Engle-Granger method was used. Income, population structure, and population growth was identified as the significant contributing factors to explain variations in HCE. The estimated income elasticity for HCE was found 0.99 < 1 showing health care was a necessity. The results confirmed a feed-back hypothesis between health expenditure and income per capita. Money spending and health care expenditure relationship has long been established (Getzen, 2014). Better health has been identified as an important factor to raise economic growth and increased productivity. A healthy population of any country is of important importance and has positive connections to economic growth (Sachs, 2002; Khan et al., 2015). However, rapidly growing HCE is a matter of grave concern for policy and decision makers across countries in the world. The fast growth rate of health care spending exerts pressure on various sectors of the economy, which might slow down the economic growth sustainability (Jakovljevic and Milovanovic, 2015; Jakovljevic, 2016) create poverty trap, as more out-of-pocket health expenditure hugely affects household income (Khan et al., 2015). Health care expenditure and the Malaysia case Malaysia with a total land area of 329,758 square kilometers is one of the leading and fast growing high middle-income economies in the Southeast Asian countries. The total population of the country is approximately 29,717 million which is distributed within 14 states, with a per capita gross national income of US $22 (international PPP); and life expectancy rate ranging from 72 to 76 years at birth of male and female respectively. It spends US$ 938 billion total on health with a growth rate of more than 4.49% on HCE (WHO, 2013). Malaysia, a rapidly fast growing developing economy in the Southeast Asian countries, spent 2.94, and 4.49% of GDP on its total health expenditure, in 1997 and 2012, respectively. The overall per capita spending over the same period was US $223 and US$463, respectively. In 2012, the sector-wise share of health care financing expenditure was: Ministry of health 44%; out-of-pocket 37%; private insurance 7%; other federal agencies 4% (MOH, 2014). The health expenditure growth rate of 4.49%, when compared to the annual GDP growth rate of 6%, shows the persistent rise in growth of health expenditure which might cause slowing down growth process of economy to a snail's pace. This might exert burden on country's GDP in the form of deficit budget, provision of health care services, and patients out of pocket finances. Thus, it is needed to model and forecast determinants of health care expenditure and future trends in the health care spending, in order to devise appropriate policies to control the rapidly growing HCE growth, equitable health care services provision, and affordable treatments to the people of Malaysia. This paper aims at, modeling the determinants of health care expenditure (HCE) and the effects of contributing factors of increased health care spending on economic growth by using annual data ranging from 1981 to 2014 in Malaysia.