Estimating the causal impact of healthcare expenses on life expectancy at birth: Exploring an instrumental variable approach with hospital payment schemes in OECD countries, Central and Eastern Europe and Central Asia

This study estimates the causal impact of healthcare expenditures on life expectancy at birth using an instrumental variable approach. Instruments of Fee for Service (FFS) and Patient Based payments (PBP), hospital payment systems are used for healthcare expenditure per capita on aggregate country level data from 1990 – 2005 for 20 OECD and 28 Eastern Europe and Central Asia countries. Our results indicate a significant positive association of healthcare expenditure on life expectancy at birth in OECD countries. However, the results need to be aware of the challenge of a precise classification of hospital payment system, potential endogeniety of the proposed instruments, thus the overall reliability and validity of the instrument. 1: Introduction In recent years, countries have been burdened by rising healthcare cost, compounded by a rapidly aging population (Heijink et al., 2013; Cutler, 2002; Wubulihasimu et al., 2015; Moreno-Serra and Wagstaff, 2001; Or, 20010 ). This has led to debate on the effectiveness of increasing healthcare expenditure versus other public health or broader policy programs like education, sanitation transportation that affect health outcomes (Nolte and Mckee, 2004). Cutler (2002) provides a good historical overview of the evolving healthcare cost landscape driven by polarizing equity and efficiency needs. The first movement was about ensuring healthcare access to all through delivery of healthcare coverage. This weighed heavily on the healthcare budget and cost was further accentuated by adoption of more technologically advanced medical care. The subsequent backlash drove cost management through rationing of technology, expenditure caps, encouragement of lower coverage insurance plans and incentivizing doctors to serve less. Although the regulations were successful in reigning in cost, this came at a price of decreased efficiency in healthcare service provision such as increased waiting time. Consequently, a third wave of transformation emerged through healthcare financing innovation in areas like hospital payment schemes, to promote a better balance between equity and efficiency concerns (Cutler, 2002). Much research in this area of effectiveness of healthcare expenditure involves: exploring the value of such health care spending in its efficiency on health system performance and its contribution to health outcomes (Heijink et al., 2014; Or, 2001; Martin et al., 2008); examining the impact of various healthcare financing on healthcare expenditure and health outcomes (Wubulihasimu et al., 2015; Moreno‐Serra and Smith, 2015; Moreno-Serra and Wagstaff,2010) ; establishing the determinants of health outcomes (Or, 2001; Nixon and Ulmann, 2006). Whilst the field of Health Technology Assessment has been able to prove the effectiveness of healthcare technologies in a micro context, especially on specific disease level, there has been mix evidence of macro level health care system expenditure on health outcomes (Or, 2001; Heijink et al., 2013; Martin et al., 2007). Given the importance of the rising share of healthcare expenditure in GDP, estimating a causal effect of healthcare expenditure on health outcomes like QALY, life expectancy and amendable mortality rates is important for a better assessment of healthcare system performance, cost effectiveness and its