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February 2010, Vol. 133, No. 2

Producing disease-based price indexes

Ralph Bradley, Elaine Cardenas, Daniel H. Ginsburg, Lyubov Rozental, and Frankie Velez

Ralph Bradley is a research economist, Elaine M. Cárdenas is an economist, and Daniel H. Ginsburg and Frankie Vélez are supervisory economists, all in the Office of Prices and Living Conditions, Bureau of Labor Statistics; Lyubov Rozental is a software engineer with BAE Systems, a contractor for the Bureau of Labor Statistics. E-mail: bradley.ralph@bls.gov

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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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-andservices concept, as distinct indexes for physicians’ services, hospital and related services, prescription drugs, and nonprescription drugs and medical supplies.¹

This excerpt is from an article published in the February 2010 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.

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Footnotes
1 A full description of how the CPI measures medical care price movement can be found in "Consumer Price Index: Measuring Price Change for Medical Care in the CPI" (Bureau of Labor Statistics, Feb. 23, 2010), on the Internet at www.bls.gov/cpi/cpifact4.htm (visited Feb. 28, 2010).