Abstract
This article examines the transmission of shocks among different sectors of the health care industry using financial market data in an excess-return model. As suggested by the nature of the reimbursement schemes, we find a significant linkage between the payor and product sectors. A significant and stronger linkage between the payor and provider sector exists. Given its competitive and well-diversified operating environment, the product sector may be better positioned to absorb shocks from the other health care sectors.
Notes
1 While we recognize that government and nonprofit organizations are an integral part of the health care system, they are not directly included and are thus treated as exogenous in our analysis. To the extent that they influence the behaviour of the profit-driven participants, their actions may be determinants of company earnings. Treating these participants as exogenous does not, however, interfere with our excess-return market model results as they can be thought of as part of the market characteristics that makes the health care industry and its’ sectors unique.
2 We performed a test to determine if shocks in the individual equations that make up the VAR were contemporaneously correlated. The log-likelihood ratio test statistic is computed as LR = 2(LL u − LL r ) where LL u and LL r are the maximized values for the log-likelihood functions for the unrestricted and restricted models, distributed χ2 with 3 degrees of freedom and was 645.7, significant at less than the 1% level.
3 Full VAR estimation results are available upon request. Note that the order of the VAR was determined to be one and was chosen via Akaike's information criterion.