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University of Georgia

Department of Economics

The Effect of Health Spending on Depression Rates

Eric Crislip, Chandler Ellis, Madison Pilgrim, Karan Pol

ECON 4750: Introduction to Econometrics

Dr. Christopher Cornwell

December 6, 2018
ECON 4750
Fall 2018

I. Introduction, Empirical Question, and Relevant Background

Depression diagnoses are on the rise in the United States, with an alarming 33% increase

from 2013 to 2016–which many believe to still be an underestimate.1 This epidemic is not only

an existential crisis, but an economic one. The United States spends billions on mental illness

each year through funding for care, treatment and rehabilitation, as well as compensation for lost

productivity.2 However, this government spending alone does not cover the true societal cost of

mental illness. As outlined in the human capital approach by Rice and Miller, depression limits

societal access to the valuable economic resources a person offers –labor, knowledge, and

experience –limiting not only one’s own productivity, but the productivity of an economy at

large by limiting the marginal product of labor in a number of ways.3

Depression may create barriers to the development of human capital, referring to

educational attainment or a general motivation to learn new skills. It may further create

inefficiencies by preventing workers from accessing jobs optimally suited for their individual

characteristics, a case of underemployment or misallocation of labor resources. In the most

severe cases, depression may cause workers to drop out of the labor force entirely, or even

commit suicide.

Researchers have made several attempts to quantify the economic costs of mental illness.

Rice and Miller estimate that cost to be $147.8 billion in 1990.4 Greenberg et al. stated their

estimate to be $83.1 billion in 2000.5 Finally, WHO researchers estimated the cost to be $925

billion among the world’s 36 largest countries in 2013.6 What is clear is that on every scale,

Maggie Fox, “More Teens… Depression Diagnoses…,” NBCNews.
Dorothy P. Rice and Leonard S. Miller, “Health Economics and Cost… of Anxiety…,” British Journal of
Greenberg et al., “The Economic Burden of Depression…,” Current Neurology and Neuroscience Reports.
Chisholm et al., “Scaling-up Treatment of Depression … Investment Analysis,” The Lancet Psychiatry.

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mental illness imposes significant costs to any economy. However, this is not an irreversible

trend, as government spending and other efforts can be employed to fight increasing rates of

depression with appropriate treatment option. The WHO paper comes with a bold claim

regarding health spending on depression, where could be a potential return on investment of

approximately $5.30 for every $1 spent.7

How does government spending at the state level affect depression rates? Given the

economic imperative to reduce the prevalence of depression, this is a vital question to answer. In

this paper, we attempt to isolate the effects of government spending through regression analysis

by holding economic, demographic, and physical health variables fixed, utilizing data from the

Substance Abuse and Mental Health Services Administration, U.S. Census Bureau, Center for

Disease Control, and Federal Register8.

II. Empirical Model and Estimation

Employing data obtained from the federal government, we constructed the following model,

focusing on factors of state economy, general demographics, and disease rates as covariates for

health spending:

𝑑𝑒𝑝𝑟𝑒𝑠𝑠𝑖𝑜𝑛𝑖𝑡 = 𝛽0 + 𝛽1 ℎ𝑒𝑎𝑙𝑡ℎ𝑖𝑡 + 𝛽2 𝐺𝑆𝑃𝑖𝑡 + 𝛽3 𝑎𝑔𝑒𝑖𝑡 + 𝛽4 𝑝𝑐𝑡𝑤ℎ𝑖𝑡𝑒𝑖𝑡

+ 𝛽5 𝑝𝑐𝑡𝑏𝑙𝑎𝑐𝑘𝑖𝑡 + 𝛽6 𝑝𝑐𝑡𝐻𝑆𝑑𝑖𝑝𝑙𝑜𝑚𝑖𝑡 + 𝛽7 ℎℎ𝑖𝑛𝑐𝑜𝑚𝑒𝑖𝑡

+ 𝛽8 𝑝𝑜𝑣𝑡𝑦𝑟𝑎𝑡𝑒𝑖𝑡 + 𝛽9 ℎ𝑒𝑎𝑟𝑡𝑎𝑡𝑡𝑎𝑐𝑘𝑖𝑡 + 𝛽10 𝑐𝑎𝑛𝑐𝑒𝑟𝑖𝑡

+ 𝛽11 𝑑𝑖𝑎𝑏𝑒𝑡𝑒𝑠𝑖𝑡 + 𝑎𝑖 + 𝑢𝑖𝑡

This model defines health spending (lhealth) as the log of the per capita amount of state

and local government spending on health initiatives, measured in dollars, measuring its

effect on state-wide depression rates (depression). This spending is controlled for gross

More information available in the “data” section. All data sources are outlined explicitly under “data sources”.

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state product (GSP), measured in millions of dollars, to contextualize spending in terms

of the size of each state’s economy. The variable depression is measured by the percent of

total state population that had a “major depressive episode” within the past year.

Demographic variables are added to control for time-varying population differences

between states and increase precision. The age variable represents the median age of

citizens per state. Race effects are accounted through pctwhite and pctblack, representing

a percentage of the total state population who identify as only Caucasian or only African-

American. Educational attainment is defined by pctHSdiploma, representing the percent

of total state population to have attained at least a high school diploma. Financial

security variables are defined through hhincome, representing median household income

by state, and povtyrate, representing poor and poverty rates. Disease prevalence rates

among state populations are captured through heartattack, cancer, and diabetes; the

former two are measured in mortality rates per 100,000, while the latter is measured by

percent of total state population diagnosed. These are included as they are expected to be

correlated with both health spending and depression rates. Though we do run an

estimation with an additional variable, FMAP (Federal Medical Assistance Percentages),

the percentage of total Medicaid spending covered by the federal government, we do not

include this in the population model as we do not expect it to be correlated with

depression. Of course, the ui term accounts for any idiosyncratic (time-varying) error,

while the ai term accounts for unobserved effects that are constant over time, also known

as fixed effects.

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This same research design is again applied with rates for any mental illness used

as the dependent variable, to compare with the depression results, aiding in an accurate


As our data is in panel form, being repeated observations on the same set of

subjects (states), we have reason to believe there may be time-constant unobserved

differences (ai) between states, and we therefore utilize a fixed effects (FE) estimation

technique. It is possible the use of FE would provide invalid test statistics, as it imposes

assumptions of both homoskedasticity as well as no serial-correlation, but we account for

this through the use of clustering to obtain heteroskedasticity and serial-correlation robust

standard errors.

Since we are employing FE estimation, we time-demean our data, such that

𝑑𝑒𝑝𝑟𝑒𝑠𝑠𝑖 ̃ 𝑜𝑛𝑖𝑡 = 𝑑𝑒𝑝𝑟𝑒𝑠𝑠𝑖𝑜𝑛𝑖𝑡 − ̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅


where ̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅̅
𝑑𝑒𝑝𝑟𝑒𝑠𝑠𝑖𝑜𝑛𝑖 is the mean with respect to time, and run pooled OLS. This process

eliminates the intercept β0 as well as ai, as a constant subtracted by its mean is 0. Thus

transformed, our model now becomes:

̃ 𝑖𝑡 = 𝛽1 ℎ𝑒𝑎𝑙𝑡ℎ
𝑑𝑒𝑝𝑟𝑒𝑠𝑠𝑖𝑜𝑛 ̃ 𝑖𝑡 + 𝛽2 𝐺𝑆𝑃
̃𝑖𝑡 + 𝛽3 𝑎𝑔𝑒 ̃ 𝑖𝑡
̃𝑖𝑡 + 𝛽4 𝑝𝑐𝑡𝑤ℎ𝑖𝑡𝑒

̃ 𝑖𝑡 + 𝛽6 𝑝𝑐𝑡𝐻𝑆𝑑𝑖𝑝𝑙𝑜𝑚
+ 𝛽5 𝑝𝑐𝑡𝑏𝑙𝑎𝑐𝑘 ̃ ̃
𝑖𝑡 + 𝛽7 ℎℎ𝑖𝑛𝑐𝑜𝑚𝑒𝑖𝑡

+ 𝛽8 𝑝𝑜𝑣𝑡𝑦𝑟𝑎𝑡𝑒 ̃ 𝑖𝑡 + 𝛽10 𝑐𝑎𝑛𝑐𝑒𝑟

̃ 𝑖𝑡 + 𝛽9 ℎ𝑒𝑎𝑟𝑡𝑎𝑡𝑡𝑎𝑐𝑘 ̃ 𝑖𝑡

̃ 𝑖𝑡 + 𝑢𝑖𝑡
+ 𝛽11 𝑑𝑖𝑎𝑏𝑒𝑡𝑒𝑠

We assume the model complies with the core Fixed Effects assumptions: that our

model can be expressed linearly, that our cross-sections were randomly sampled, that

there is no perfect multicollinearity, and that the idiosyncratic error (ui) for any given

time period is uncorrelated with the dependent variables in every time period (strict

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exogeneity). Under these assumptions, Fixed Effects is unbiased and consistent.

However, the strict exogeneity requirement is rather irrational, as it is likely that health

spending is correlated with a number of unobserved factors that affect depression rates,

such as air quality9. If so, this would introduce omitted variable bias (OVB) in the model,

which would imply that our estimated coefficients are inaccurate.

III. Data

As it was not possible to acquire all the data necessary for our analysis from a single

source, we used a combination of independent cross-sections and direct reports from government

agencies for years 2014-2016. Depression rates were obtained from the SAMHSA’s National

Survey on Drug Use and Health. Data on government spending as well as Gross State Product

was collected from US Government Spending (which was in turn acquired from the Census

Bureau). Information was used for both “local” and “state” level spending to correct for

differences in administrative centralization and accounting methodology. Estimates on disease

rates were obtained from the CDC and may have been subject to round-off error, as much of the

data was rounded to only one decimal. Data for racial demographics and educational attainment

was not readily available and required additional calculation; these estimates may also be subject

to error. Information for federal spending by state was not available, as such reports were

discontinued in 2011. Instead, we acquired FMAP rates for Medicaid through the Kaiser Family

Foundation (which obtained said information from the Federal Register). Household income,

poor and poverty rates (poverty alone is unavailable), and median age by state were all collected

directly from Census Bureau estimates.

It is possible air quality is negatively correlated with both health spending and depression rates. This would be
difficult to measure, as neither air quality nor population geography are evenly distributed, and air quality is not

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IV. Results

Table 2 displays the results from the FE regression explained above, expressed in

multiple stages. The first regression controls only for Gross State Product, with each subsequent

regression accounting for effects of demographics, education/financial status, disease rates, and

federal Medicaid assistance respectively. A similar method is followed for the purposes of the

general mental illness regression in Table 3.

From the results in Table 2, the overall depression rate for a state is expected to increase

by approximately 1 percentage point for every 1% increase in health spending. In the full model,

including all covariates, the coefficient on lhealth suggests a 1.06% percentage point increase in

the depression rate for every 1% increase in health spending (Table 2, regression 5). This

coefficient is statistically significant at a .05 level, with a t-statistic of approximately 2.26. This

level of significance holds for every iteration of the regression run in Table 2. In context,

however, hese results are rather severe –a 1% percentage point increase is substantial in a sample

with a mean of 6.92% (Table 1). However, they are rather implausible or at the very least,

counterintuitive: the coefficient is positive, implying that depression rates increase as health

spending increases. A more reasonable interpretation of the results is reverse causality: that

though health spending and depression rates are positively correlated, it is the increase in

depression that causes the increase in spending, not the other way around. By developing a

model with health spending as the dependent variable, explained by depression rates and other

covariates, this would be clear.

Of some note are the relatively low R2 values, ranging from a maximum of .233, when

accounting for all covariates, down to 0.059, indicating that a substantial amount of the variance

in depression rates is still left unexplained. It is likely that there are a number of unobserved

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effects that were omitted from this model, such as air quality or social attitudes towards

depression, which may lead to OVB.10 Furthermore, it is very likely our controls for physical

illness did not tell the whole story: many other physical conditions may be correlated with both

health spending and depression, while proving resilient against treatment.

The findings in Table 3 are somewhat interesting, as there are almost no significant

results for any of the explanatory variables, across all five regression stages. Only in stage 5,

with the addition of the FMAP variable, is there a sign of significance, which falls in line with

the orthodox thinking that health spending holds some negative effect on depression rates.

V. Conclusion

Unfortunately, we were unable to determine the effect of state-level government spending

on depression rates. Instead, our results suggested something rather implausible: that state

government health spending increases depression rates. Our findings most likely capture reverse

causality: that depression rates tend to drive government spending. But even if our findings

supported our hypothesis, we would have reason to exert caution while interpreting our results –

government spending and mental health are both complex and multifaceted phenomena, and we

expect there to be many unobserved factors we have not controlled. For future research, it may

be more useful to utilize a difference-in-difference design to test the outcomes of mental health

treatment programs, rather than focusing on macro-level trends in spending and depression rates.

If mental health spending was randomly assigned, rather than driven by mental health itself, the

study would be able to produce results unaffected by reverse causality.

Which may discourage treatment, thereby having a negative correlation with health spending, but a positive
correlation with depression rates,

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1. Chisholm, Dan, Kim Sweeny, Peter Sheehan, Bruce Rasmussen, Filip Smit, Pim
Cuijpers, and Shekhar Saxena. "Scaling-up Treatment of Depression and Anxiety: A
Global Return on Investment Analysis." The Lancet Psychiatry3, no. 5 (2016): 415-24.
2. Fox, Maggie. "More Teens, Young Adults Get Depression Diagnoses, Insurance Co
Finds." NBCNews. Accessed December 05, 2018.
3. Greenberg, P. E., R. C. Kessler, H. G. Birnbaum, S. A. Leong, S. W. Lowe, P. A.
Berglund, and P. K. Corey-Lisle. "The Economic Burden of Depression in the United
States: How Did It Change between 1990 and 2000?" Current Neurology and
Neuroscience Reports. December 2003. Accessed December 05, 2018.
4. Rice, Dorothy P., and Leonard S. Miller. "Health Economics and Cost Implications of
Anxiety and Other Mental Disorders in the United States." British Journal of
Psychiatry173, no. S34 (1998): 4-9. doi:10.1192/s0007125000293458.

Data Sources

Spending and GSP:


Race and educational attainment:

Household income:

Poor and poverty rate:


Heart disease:




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Tables and Figures

Table 1: Summary Statistics

(1) (2) (3) (4) (5)

VARIABLES N mean sd min max

povtyrate 150 13.07 3.404 6.400 23.10

age 150 38.19 2.386 30.40 44.60
hhincome 150 57,029 9,184 35,521 76,260
GSP 150 355,298 444,204 29,360 2.603e+06
heartattack 150 167.2 27.97 114.9 240.5
cancer 150 160.9 15.22 122.4 198.8
pctwhite 150 0.796 0.130 0.204 0.963
pctblack 150 0.108 0.0950 0.00589 0.378
diabetes 150 10.26 1.792 6.600 15
FMAP 150 0.590 0.0809 0.500 0.742
pctHSdiplom 150 0.847 0.0286 0.771 0.902
lhealth 150 7.713 0.254 7.035 8.268

Number of state 50 50 50 50 50
Table 2: Results from FE regressions of depression rates on health spending

(1) (2) (3) (4) (5)

VARIABLES depressionrate depressionrate depressionrate depressionrate depressionrate

lhealth 0.0122** 0.0142** 0.0136** 0.0107** 0.0106**

(0.00590) (0.00574) (0.00565) (0.00458) (0.00469)
GSP -1.44e-08 -1.22e-08 -1.52e-08 -2.16e-08 -2.07e-08
(1.12e-08) (1.59e-08) (1.62e-08) (1.32e-08) (1.35e-08)
age -0.00222 -0.00375 -0.00451 -0.00412
(0.00377) (0.00351) (0.00334) (0.00338)
pctwhite -0.0686** -0.0736** -0.0733*** -0.0738***
(0.0301) (0.0311) (0.0270) (0.0261)
pctblack -0.255 -0.246 -0.391** -0.366**
(0.178) (0.181) (0.178) (0.178)
povtyrate -0.000155 -0.000410 -0.000440
(0.000324) (0.000354) (0.000361)
hhincome 4.47e-08 4.67e-08 4.22e-08
(4.93e-08) (4.32e-08) (4.40e-08)
pctHSdiplom 0.0245 0.00198 0.000775
(0.0461) (0.0471) (0.0467)
heartattack -0.000171 -0.000178
(0.000140) (0.000143)
cancer -0.000244** -0.000216*
(0.000111) (0.000115)
diabetes -0.00189* -0.00163*
(0.000944) (0.000962)

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FMAP -0.0557
Constant -0.0194 0.131 0.177 0.355** 0.367**
(0.0435) (0.150) (0.142) (0.169) (0.164)

Observations 150 150 150 150 150

R-squared 0.059 0.125 0.142 0.225 0.233
Number of state 50 50 50 50 50
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1

Table 3: Results from FE regression of any mental illness on health spending

(1) (2) (3) (4) (5)
VARIABLES anymillness anymillness anymillness anymillness anymillness

lhealth 0.00544 0.0129 0.0141 0.0120 0.0117

(0.0126) (0.0134) (0.0133) (0.0137) (0.0139)
GSP -3.21e-08 -8.06e-09 -2.51e-09 -7.92e-09 -4.71e-09
(2.80e-08) (3.46e-08) (3.69e-08) (3.54e-08) (3.79e-08)
age -0.0108 -0.00782 -0.00720 -0.00585
(0.00772) (0.00734) (0.00727) (0.00707)
pctmale 0.162 0.139 0.120 0.134
(0.305) (0.285) (0.287) (0.294)
pctwhite 0.0117 0.0226 0.0250 0.0230
(0.0632) (0.0686) (0.0669) (0.0646)
pctblack -0.522 -0.558 -0.661* -0.570
(0.360) (0.358) (0.367) (0.360)
povtyrate 0.000605 0.000367 0.000257
(0.000573) (0.000703) (0.000692)
hhincome 7.72e-08 8.47e-08 6.84e-08
(7.60e-08) (7.27e-08) (7.36e-08)
pctHSdiplom -0.0784 -0.0983 -0.103
(0.0833) (0.0906) (0.0876)
heartattack -0.000118 -0.000141
(0.000229) (0.000221)
cancer -0.000145 -4.19e-05
(0.000297) (0.000300)
diabetes -0.00200 -0.00104
(0.00179) (0.00204)
FMAP -0.207**
Constant 0.157* 0.472 0.406 0.503 0.542
(0.0916) (0.304) (0.301) (0.362) (0.347)

Observations 150 150 150 150 150

R-squared 0.010 0.078 0.106 0.124 0.158
Number of state 50 50 50 50 50
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1