Effect of air pollution on health care expenditure: Evidence from respiratory diseases

Recent reports show that at least 95% of the world's population is breathing polluted air. However, the impact of air quality on air pollution-related medical expenditure and utilization is sparse. This study estimates the short-term health care cost impacts of air pollution using a meteorological phenomenon-thermal inversion-as an instrumental variable for air quality. Using information on outpatient care for respiratory diseases from universal health insurance claim data in Taiwan during 2006-2012, our estimates suggest that a one-unit reduction in the air quality index (AQI) leads to NT$2.3 billion (nearly US$74 million) of savings in respiratory-related outpatient expenditure per year. Given that the average AQI is equal to 32 during our study period, completely removing air pollution would reduce the national health expenditure by approximately 8% annually. Our results provide the important implication that the cost of controlling air pollutant emissions can be offset by curtailing health care expenditure.