76 Journal of Reviews on Global Economics, 2015, 4, 76-86 E-ISSN: 1929-7092/15 © 2015 Lifescience Global Convergence of Health Expenditure in OECD Countries: Evidence from a Nonlinear Asymmetric Heterogeneous Panel Unit Root Test Didem Pekkurnaz * University of North Carolina at Chapel Hill (UNC-CH), Department of Economics, 107 Gardner Hall, NC 27599, USA Abstract: This paper examines the convergence in health expenditure across 22 OECD countries between 1980 and 2012 by implementing panel unit root tests. Contribution of application of the nonlinear asymmetric heterogeneous panel unit root test is twofold. Firstly, it relaxes the assumption of cross-sectional dependency in panel data. Secondly, it incorporates the asymmetric nonlinear mean reversion in a panel setting. Results show that while the conventional panel unit root test cannot reject the null hypothesis of a unit root in relative per capita health expenditures for the whole set of countries, both the symmetric and the asymmetric nonlinear panel unit root tests indicate the stationarity of the panel. Specifically, almost 23 percent of the countries are found to be converging by employing the nonlinear asymmetric panel unit root test. In addition, introducing asymmetric structure helps to uncover additional converging countries which cannot be detected using linear and nonlinear symmetric panel unit root tests. Keywords: Health care expenditures, Convergence, Nonlinear asymmetric panel unit root tests, OECD Countries. 1. INTRODUCTION According to the Organization for Economic Cooperation and Development (OECD) Health Statistics 2014, OECD average per capita health care expenditure (US$ PPP) and health expenditure as share of GDP have been rising over the period 2000- 2012 although there has been a decline between 2009 and 2011 due to global financial crisis. The United States (US) has always been the country with the highest spending on health over the period 2000-2012. Health spending accounts for 16.9% of GDP in US in 2012, which is higher than OECD average 9.3%. Turkey and Mexico, on the other hand, have the lowest per capita health expenditures in 2012 (less than a third of the OECD average). The estimated average growth rate of per capita health expenditure across OECD countries is 4.1% between 2000 and 2009 while between 2009 and 2011 the growth rate is only 0.2%. 1 Although US has the highest per capita health expenditure among OECD countries, its growth rate on per capita health spending, in real terms, over the period 2000-2009 is 3.4% which is less than the growth rates of countries such as Korea and New Zealand (9.3% and 4.5% respectively) with per capita health expenditures lower than OECD average for the period 2000-2009. *Address correspondence to this author at the University of North Carolina at Chapel Hill (UNC-CH), Department of Economics, 107 Gardner Hall, NC 27599, USA; E-mail: didempnz@gmail.com 1 See OECD (2013) for details. Countries’ spending on health care and the rate at which it grows depend on different market and social factors, differences in organization and financing of health care systems, and the level of technology of countries. Improvements in medical technologies, population aging and rising consumer expectations lead to increase in health expenditure growth (Huber and Orosz 2003). Newhouse (1992) conjectures that technological advancement is a major contributor to health care expenditure accounting for almost 75% of increase in health expenditures. Okunade and Murthy (2002) econometrically test this hypothesis for US and confirm that changes in R&D spending (proxy for the technology) is a long run factor of rising health care expenditure. Another factor affecting health expenditure is population aging. Since health expenditure per person for older people is greater than health expenditure per person for younger people, countries with rising older population might experience rising health expenditure. In addition to these, different environmental conditions and lifestyles might also generate differences in types of diseases experienced across countries which may lead to varying levels of health expenditures. Considering the differences in health expenditures across countries, concept of convergence in health expenditures has been investigated by many researchers. Economic convergence is based on neoclassical growth theory. The theory states that in the long run countries with similar preferences and technology will reach to a common steady state level of income per capita. Poor countries tend to grow faster than rich ones and eventually they will catch-up. Since health expenditure rises when income expands, health