Producing Disease-Based Price Indexes: Using a Total-Expenditure Scope and Adjusting for Utilizations under a Treatment Concept for Measuring Health Care Costs Slows Down the Rate of Growth of Medical Prices; the Downside Is That Most of the Saving Is Seen in Insurance Benefit Payments and Not in Out-of-Pocket Payments or Lower Insurance Premiums for Consumers

By Bradley, Ralph; Cardenas, Elaine et al. | Monthly Labor Review, February 2010 | Go to article overview

Producing Disease-Based Price Indexes: Using a Total-Expenditure Scope and Adjusting for Utilizations under a Treatment Concept for Measuring Health Care Costs Slows Down the Rate of Growth of Medical Prices; the Downside Is That Most of the Saving Is Seen in Insurance Benefit Payments and Not in Out-of-Pocket Payments or Lower Insurance Premiums for Consumers


Bradley, Ralph, Cardenas, Elaine, Ginsburg, Daniel H., Rozental, Lyubov, Velez, Frankie, Monthly Labor Review


There are two basic ways of measuring health care costs. The first, labeled the "goods-and-services" concept, measures the cost of each medical good and service separately. The second, called the "treatment concept," measures the cost of all the goods and services used to treat a particular disease. With an eye toward improving the accuracy of the Consumer Price Index (CPI), the National Academies' Committee on National Statistics (CNSTAT) recommends the latter approach. In pursuit of satisfying the CNSTAT recommendation, this article compares these two concepts as they apply to constructing price indexes for medical care. The article does not select which concept is best: each approach provides different information. The first measures the contribution of each medical input to total health care inflation, whereas the second indicates how each disease influences health care inflation.

Ideally, what is sought to be measured is the cost of the healing that is derived from using medical goods and services. However, the amount of healing derived from a service cannot be directly measured; instead, only what is readily observable, such as the physician office visit, the hospital stay, or the prescription drug purchase, can be measured. Accordingly, in measuring medical care inflation as part of the CPI, the BLS collects prices for goods and services such as physician visits, emergency room visits, and prescription drug purchases. The resulting measures of medical price change are published, under the goods-and-services concept, as distinct indexes for physicians' services, hospital and related services, prescription drugs, and nonprescription drugs and medical supplies. (1)

As long ago as 1967, it was recognized that "the average consumer of medical care is not as interested in the price of a visit or hospital day as he is in the total cost of an episode of illness." (2) Several well-known economists have been interested in the "total cost of an episode of illness" (the treatment concept) because there is evidence that, over time, the mix of goods and services used to treat a particular disease has changed and less expensive treatments have become substitutes for more expensive ones. In addition, interest has arisen in the economic effects of improved healing outcomes for certain diseases.

Over the years, economists have attempted to compute price indexes for the entire treatment of an episode of disease, rather than computing separate indexes for each of the goods and services used to treat a particular disease. Matthew D. Shapiro and David Wilcox constructed a price index for treating a cataract and found that, during the last quarter of the 20th century, there was a shift in point of service for this procedure from an inpatient hospital setting to an outpatient surgical center. (3) This move away from the inpatient hospital reduced the price of treating an episode of surgery for removal of a cataract. David M. Cutler, Mark McClellan, Joseph P. Newhouse, and Dahlia Remler examined how acute myocardial infarction (one kind of heart attack) was treated and found that prices for treating the condition had actually decreased when the increased longevity resulting from new surgical procedures was taken into account. (4) Finally, Ernst R. Berndt and colleagues argued that prices for treating depression fell with the introduction of a new generation of antidepressants--the selected serotonin reuptake inhibitors--as the improved pharmaceuticals became a cheaper alternative to expensive psychotherapy. (5)

In treating medical conditions, not only do the relative proportions of goods and services change over time, but the average intensity of use also changes. For instance, in the treatment of diabetes, the utilization of all medical goods and services has increased. The treatment concept allows changes to be incorporated into the composition and intensity of use of the goods and services utilized to treat particular diseases. …

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Producing Disease-Based Price Indexes: Using a Total-Expenditure Scope and Adjusting for Utilizations under a Treatment Concept for Measuring Health Care Costs Slows Down the Rate of Growth of Medical Prices; the Downside Is That Most of the Saving Is Seen in Insurance Benefit Payments and Not in Out-of-Pocket Payments or Lower Insurance Premiums for Consumers
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