In the last few years, tremendous growth in the healthcare industry has been seen for various economic, noneconomic, and environmental reasons, which is a serious concern for health economists, policymakers, and researchers. There are two views regarding healthcare expense. One group of researchers (Azam et al. 2019) believe that healthcare expenditure is a luxury, like a commodity, so it is necessary to rely on market forces. Another group (Chaabouni and Saidi 2017; Ye and Zhang 2018; Wang et al. 2019) believe that healthcare expenditure is necessary, and the government should intervene. Although significant spending on healthcare is necessary for economic development, excessive spending leads to an extra burden on government finances. Healthcare spending in the Organization for Economic Cooperation and Development (OECD) countries has shown a tremendously increasing trend. OECD countries spend almost 85% of world spending on health, while the population of those countries is less than 20% of the world total (Blázquez-Fernández et al. 2019). OECD countries have the highest healthcare expenditure in the world.
Figure 1 shows that, over time, healthcare expenditure increased gradually in OECD countries. In 2003 it was about 7.8% of gross domestic product (GDP), which increased to 8.8% in 2018, and is expected to reach 10.2% by 2030 (OECD 2019). One of the major challenges faced by the OECD is this continuous increase in healthcare expenses as a percentage of GDP.
Figure 2 shows is a comparison between healthcare expenditure of the United States (US) and the other OECD countries. The graph shows that before 2007, the US had higher health expenditure compared to the OECD as a whole, and after 2007, there was a decrease in health expenditure due to its high cost, few people were able to cover the private health care which has ultimately reduced the health expenditure growth.
The recent COVID-19 pandemic exerts pressure on healthcare expenditure, which has risen drastically (Apergis et al. 2020). In the United Kingdom (UK), it has risen to about 10% of GDP. As the infection spreads, it puts an excessive burden on the healthcare system. There is a limited supply of resources such as medical staff, hospital beds, protective suits, and ventilators (Bénassy-Quéré et al. 2020).
According to OECD Health Statistics (2019), during COVID-19, the OECD countries face the problem of critical bed capacity for the population, with Mexico in the lowest category. On average over one-fifth of health spending comes from private financing, while, in the case of treatment of COVID-19, about a quarter of financing comes from households themselves.
There are some positive effects of increasing healthcare expenses such as reduced illness and increased numbers of jobs, but unnecessary spending on healthcare means cuts have to be made elsewhere. Air pollution badly affects health and leads to an increase in healthcare expenditure. Pollutants include sulfur dioxide, carbon monoxide, and nitrogen dioxide, which cause respiratory diseases, pulmonary problems, asthma, food allergies, bronchitis, reduced lung growth, lung cancer, and reduced life expectancy (Sekar et al. 2016; Xie et al. 2018; Ma et al. 2018). It is necessary to identify the major drivers of healthcare spending, which include environmental deterioration (air pollution), along with other economic (e.g., GDP, foreign direct investment (FDI) inflow) and noneconomic (e.g., education) factors. In the long run, there is a direct positive connection between health and education. Improved health is a significant feature in enhancing the productivity of the labor force. Investment in health and education leads to improved health and a higher level of education (Ross and Wu 1995). Healthcare expenses are rising gradually in OECD countries. GDP is an important variable for the estimation of healthcare spending. In OECD countries, it is forecast that, due to more stringent healthcare policies, there is to be a drastic decrease in healthcare expenditure (Akca et al. 2017). Increased healthcare expenditure is not solely by design, to improve health conditions, many factors contribute to healthcare expenses, such as the socioeconomic conditions, population, and the proportion of budget allocated to healthcare. The most important determinants of healthcare include GDP and the level of education in a country (Mirmirani et al. 2008).
According to Mirmirani et al. (2008), health conditions are not only determined by healthcare expenditure, but various other aspects impact the healthcare system of countries, such as the number of citizens, the area of the country, and the fiscal balance spent on healthcare which might fluctuate. Some countries with low incomes have strong health systems, which along with GDP and education make health an important indicator of prosperity.
In Fig. 3, healthcare funding is divided into public and private financing. Public financing includes health insurance and government expenditure, while private financing includes individuals’ out of pocket payments and finances from corporations and NGOs. In OECD countries, there is more public spending than private. Nearly all populations in all OECD countries are provided with healthcare coverage. Mexico has the lowest health coverage as a proportion of population, while the US has most private health coverage compared to public coverage. Switzerland and the Netherlands provide nearly 100% health coverage through private financing.
Breathing clean air is a crucial issue in this era. Continuous or increasing emissions of greenhouse gases exert severe pressure on the environment and health. Healthcare expenditure increases with environmental degradation. Many studies (Kais and Sami 2016; Yazdi and Khanalizadeh 2017) explore ecological degradation and how healthcare costs can be controlled. A major cause of environmental degradation is air pollution (Chaabouni et al. 2016). Air pollution has three types of effect. Firstly, various studies show that mortality rates have a direct connection to air pollution. In other words, when air pollution increases in an environment, it has an adverse impact on human health, in both developed and developing countries (Li et al. 2019; Kayani et al. 2020). Approximately 3.3 million people die annually in the world due to air pollution in the atmosphere (Darçın 2017). Secondly, ill health caused by air pollution leads to increased healthcare expenditure and adversely affects labor productivity. When productivity decreases, domestic output also decreases and the whole economic cycle slows down (Mehrara et al. 2011). Thirdly, the social cost of air pollution is an area of concern for policymakers and economists. Effective air quality regulation requires an exact estimate of air pollution, but if pollution is overestimated, it leads to overregulation (Lu et al. 2017), which ultimately affects the economic growth of a nation negatively.
The main air pollution in the atmosphere is greenhouse gases such as carbon dioxide (CO2) (Zaidi and Saidi 2018; Apergis and Garzón 2020). Countries’ regulators concerned about CO2 try to limit emissions into the air, as they are injurious to health and environmental sustainability (Fang et al. 2020). According to OECD forecasts, air pollution is “responsible for the premature mortality in the world”. There are many air pollutants, but the major ones are nitrogen oxides (NOx), sulfur oxides (SOx), and carbon oxides (CO2). These pollutants cause many diseases, especially related to respiration, not only damaging the environment but increasing healthcare expenditure.
Many factors are important to healthcare efficiency in OECD countries, broadly divided into three types: firstly, healthcare resources, both public and private, including medical technologies, physicians, pharmaceuticals, and hospital beds; secondly, socio-economic factors such as unemployment, education, income inequality, and household income; and finally, social factors concerning human interaction with the environment such as alcohol and tobacco consumption, dietary choices, and environmental pollution. Both socio-economic and lifestyle factors are environmental variables (Varabyova and Müller 2016).
Various studies (Mărginean 2014; Murthy and Okunade 2016; Zaidi and Saidi 2018) investigate the link between healthcare expenditure and economic growth. Investment in health can boost the economy of a country, and the researchers taking this viewpoint are in favor of huge government spending on the healthcare sector (Yao et al. 2019). Another proposition, not as well developed, is that environmental degradation harms the economic growth of a country (Atilgan et al. 2017).
Apergis et al. (2017) state that the US market gives considerable importance to oil and natural gas. However, the increasing trend for renewable energy in OECD countries is decreasing the CO2 emissions in a way that promotes a healthy environment. Additional renewable energy usage is recommended as an effective approach to fighting global warming (Apergis and Payne 2010; Jebli et al. 2016; Fernando et al. 2018). Renewable energies improve public health by reducing air pollutants, promoting economic development, and creating jobs (Liu et al. 2020). In most developed countries, renewable energies are already being used as a solution to environmental pollution by reducing the use of conventional energy sources (fossil fuels). Advancement of the green economy leads to new tools related to renewable energy, creating new employment, while providing the solution to energy demand (Pablo-Romero et al. 2016; Moktadir et al. 2019; Rehman 2020).
Although several studies explore the importance of air pollution and healthcare expenditure, there are very few which investigate the relationships among air pollution, healthcare expenditure, and economic and noneconomic factors in OECD countries. Therefore, the present research covers this gap by conducting research in selected OECD countries into the role of renewable energy variables and various air pollutants and the role of the healthcare industry and economic growth. The study makes a threefold contribution. Firstly, the study checks the relationships between two air pollutants, COx and NOx, economic growth and healthcare spending. Secondly, the study incorporates renewable energy with healthcare and its link to growth. Thirdly, the study proposes policy implications of the use of renewable energy instead of conventional energy sources, considering the importance of public healthcare expenditure.
Wang et al. (2019) study the connections among healthcare expenditure, economic growth, and CO2 using an autoregressive distributed lag (ARDL) approach. The ARDL model provides robust findings irrespective of sample size, and provides unrestricted error correction. Khan et al. (2019) studies the relationship between investment, health, and the environment using the canonical cointegrating regression (CCR) model, which is ideal for removing second-order bias in the ordinary least squares (OLS) estimator. This paper employs the panel vector error correction model (VECM) and panel fully modified least squares (FMOLS) test, appropriate to the study, to identify the association and trend of the relationships among the variables in the model. The VECM is used to examine the path of causation. It limits the long-run behavior of the endogenous variables unless they converge and provide short-run correction dynamics. FMOLS, introduced by Hansen and Phillips in 1990, is used to check the robustness of results, as it is ideal for a small amount of data. This method is ideal for achieving asymptotic efficiency by modifying the least squares and is used to estimate the association among the variables (Kalim and Shahbaz 2009). The study reveals that there is a relationship between air pollution and healthcare expenditure and that the use of renewable energy has a substantial effect on healthcare spending that triggers economic growth. Noneconomic factors play an important role in healthcare spending.
The paper is organized as follows: a review of the literature related to the impacts of air pollution, economic and noneconomic factors, and renewable energy on healthcare expenditure is given in the “Literature review” section; the “Data and methodology” section describes the data and methodology; the “Results and discussion” section provides the results, and discussion; and the “Conclusion and policy implications” section contains the conclusion and policy implications.