6
The Special Case of Medical Services

The conceptual and measurement issues that underlie a cost-of-living index (COLI) are perhaps more difficult when one attempts to construct an index for medical care than for any other component of the Consumer Price Index (CPI). Nowhere is the term “cost of living” more literally applicable than for medical care. This chapter begins by briefly outlining current procedures for calculating the Medical Care Price Index (MCPI) and then discusses a number of issues that have been raised concerning MCPI reliability and accuracy. The chapter concludes with recommendations.

BACKGROUND

Medical care is one of the eight major product groups in the current CPI. For each of these major product groups, the domain of the CPI is currently limited to prices for goods and services on which the consumer makes a direct out-of-pocket outlay. This limited domain is of particular importance in the case of medical care expenditures.

BLS decomposes consumers’ direct out-of-pocket payments for medical care into five categories:

  • prescription drugs;

  • over-the-counter drugs and medical supplies;

  • services from physicians, dentists, and other medical professionals;

  • hospitals and related services; and

  • health insurance.



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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes 6 The Special Case of Medical Services The conceptual and measurement issues that underlie a cost-of-living index (COLI) are perhaps more difficult when one attempts to construct an index for medical care than for any other component of the Consumer Price Index (CPI). Nowhere is the term “cost of living” more literally applicable than for medical care. This chapter begins by briefly outlining current procedures for calculating the Medical Care Price Index (MCPI) and then discusses a number of issues that have been raised concerning MCPI reliability and accuracy. The chapter concludes with recommendations. BACKGROUND Medical care is one of the eight major product groups in the current CPI. For each of these major product groups, the domain of the CPI is currently limited to prices for goods and services on which the consumer makes a direct out-of-pocket outlay. This limited domain is of particular importance in the case of medical care expenditures. BLS decomposes consumers’ direct out-of-pocket payments for medical care into five categories: prescription drugs; over-the-counter drugs and medical supplies; services from physicians, dentists, and other medical professionals; hospitals and related services; and health insurance.

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes When the revised CPI weights were introduced in January 1998, these five medical care categories together accounted for about 5.6 percent of total consumer expenditures. The consumers’ out-of-pocket health insurance component represents only that portion of total health insurance premiums paid for directly by the consumer. This fact partly explains why medical care is a much smaller share of total expenditure in the CPI (5.6%) than it is in the national income and product accounts. In 1999 national health expenditure was 13 percent of gross domestic product and 17.6 percent of personal consumption expenditure (see Heffler et al., 2001; U.S. Department of Commerce, 2000:Table B.4, p. D-31). The health insurance component of the CPI excludes all employers’ contributions to health insurance. To avoid double counting, it also nets out any medical expenditures for which the consumer is subsequently reimbursed by an insurer. This direct outof-pocket health insurance expenditure is by far the largest of the five MCPI components—in 1995 it comprised 49.6 percent of all out-of-pocket medical expenditures. If, instead, BLS constructed a price index for health insurance (distinct from health provider services), a number of very significant conceptual and measurement issues would need to be resolved. Although BLS is currently reassessing the feasibility of proceeding with direct measurement of prices of health insurance policies, it has not taken that route (see Greenlees and Fixler, 2000; Bureau of Labor Statistics, 2001). Rather than trying to price health insurance, the BLS distributes out-of-pocket expenditures for private health insurance (fees for service commercial carriers, Blue Cross/Blue Shield, preferred provider health plans, and health maintenance organizations) to the five MCPI subcomponents listed above. In 1995, consumer expenditures for fee-for-service commercial carrier health insurance were reallocated as follows (Ford, 1995): hospital services, 39.7 percent; physician and dental services, 34.1 percent; other medical professional services (such as home health care), 6.5 percent; prescription drugs, 6.2 percent; nursing homes, 0.6 percent; and pure insurance, 12.9 percent. By pure insurance the BLS means the services that insurers provide, such as processing claims, not payments to claimants. Thus, consumer expenditures on pure insurance services are computed essentially as premium revenues minus claims paid. Out-of-pocket expenditures to other private health insurers (e.g., Blue Cross/Blue Shield, preferred provider health plans, and health maintenance

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes organizations) are reallocated back to the five MCPI subcomponents in a similar manner. Consumers also make direct out-of-pocket payments for health insurance to the federal government, which underwrites Medicare Part B (consisting of voluntary payments, primarily by the elderly and disabled, for insurance benefits supplementary to Medicare Part A compulsory hospital insurance).1 Consumers’ out-of-pocket Medicare Part B expenditures for health insurance are also reallocated by the BLS back to the MCPI components; Ford (1995) calculated the following allocation for 1995: outpatient hospital services, 27.2 percent; physicians’ and dental services, 56.8 percent; other professional services, 9.2 percent; and supplies and durable medical equipment, 6.8 percent. Notice that BLS specifies there is no pure insurance component for Medicare Part B. Finally, to obtain the total weights by subcomponent within the MCPI, the BLS sums up, for each category, consumers’ direct out-of-pocket expenditures (except health insurance), plus the reallocated private insurance (for commercial carriers fee for service, plus similar reallocations for Blue Cross/Blue Shield, preferred provider health plans, and health maintenance organizations), plus the reallocated federal government insurance. The resulting direct consumer payments plus reallocated health insurance payment expenditure weights were as follows for January 1998 (Ford and Ginsburg, 2001): prescription drugs, 14.9 percent; over-the-counter drugs and medical supplies, 7.6 percent; physician, dental, and other medical professional services, 49.5 percent; hospital and related services, 22.9 percent; and pure health insurance services, 5.0 percent. There is considerable price discrimination in medical markets (the law of one price does not hold). Prices paid directly by patients typically exceed those paid by large insurers. Medical care providers and insurers are often reluctant to disclose proprietary price information (indeed, they are sometimes contractually prohibited from doing so). As a result, BLS faces significant operational issues in 1   Medicare Part B insurance covers physicians’ services, outpatient hospital care, and medical equipment prescribed by the physician for use in the home. A deductible applies. Generally, Medicare Part B does not cover prescription drugs, except in a few special cases. See http://www.medicare.gov/ (“Glossary” and “Frequently Asked Questions”).

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes obtaining appropriate and reliable transaction price quotes separately for the direct and indirect MCPI components. CONCEPTUAL AND MEASUREMENT ISSUES Measuring the prices of medical care services presents many challenges, both conceptual and operational. The medical care sector has undergone, and is continuing to undergo, considerable technological progress and institutional changes, resulting in changing quality of care. As discussed in Chapter 4, the prices paid by patients and insurers for medical care goods and services should, in principle, be adjusted for some, perhaps all, such quality changes in medical care. Consumers’ health status, however, depends not just on their physicians and the medicines they are prescribed but also on their own behavior and life-styles and on the environment in which they live. Thus, one cannot automatically equate changes in health status with changes in the quality of medical services. There are, in addition, profound ambiguities concerning the identity of the consumer and the individual making the consumer’s choice: Is it the patient? The patient’s family or other caregivers? The physician acting as an agent for the patient? There are also ambiguities about exactly what kinds of services the health care sector provides and hence what outputs should be priced. Diagnostic services that lead to the identification and successful treatment of a symptom can, for example, be included as part of the cost of treating a specific condition and generating a specific output. New diagnostic services that mainly allow a physician or a patient to reject an unlikely diagnosis are more difficult to classify and assess, since they may mainly deliver peace of mind rather than health. Alternatively, such diagnostic services may make patients worry about possibilities that they did not consider before, as can occur from false positives yielded by the prostate-specific antigen (PSA) test for prostate cancer or the pap smear test for cervical cancer. Ideally, the BLS should not be alone in the world trying to answer these questions. But in most other developed countries, medical services are paid for primarily by governments or government-mandated insurance funds. As a result, medical services are outside the domain of their CPIs. In large part, therefore, BLS is going it alone in addressing these difficult conceptual and measurement issues for the construction of an MCPI. Input Substitution and Pricing Episodes of Medical Treatment One of the most significant issues facing BLS is whether it should price medical inputs or medical outputs (outcomes). In years past, BLS has priced a fixed bundle of discrete inputs, such as a day in the hospital, a visit to a gastroenterologist, or a serum laboratory test. This procedure was often criticized, even as early as the 1960s (see Scitovsky, 1967). Among other problems, it overlooks

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes substitution possibilities among medical inputs for treating a particular condition. More specifically, the BLS practice of separately pricing and weighting distinct medical item strata neglected the medical care sector’s substitution across various strata (e.g., physician services, prescription pharmaceuticals, laboratory tests), thereby overstating price increases. A well-known example of this problem involves inpatient and outpatient hospitalizations. One way in which managed care has reduced overall hospitalization costs is to shift many surgeries from inpatient to outpatient environments. A consequence of this substitution is that both the severity of illnesses and the complexities of surgery for the average patient have increased over time for both inpatient and outpatient procedures, resulting in an increase in per diem costs in both settings. Because BLS priced these inpatient and outpatient procedures separately and then used constant weights over time to aggregate them, their weighted sum increased over time, even though providers’ and insurers’ total hospitalization costs (inpatient plus outpatient) for these surgical cases declined. Since the 1998 revisions, the BLS has treated inpatient and outpatient hospitalizations as a combined bundle (stratum), although the frequency with which the substrata weights will be updated has not been made clear to the panel. Another example of substitution across strata involves the treatment of a mental disorder such as depression (see Frank et al., 1998; Berndt et al., 2001). The clinical literature has demonstrated that a number of alternative treatments for depression involving various combinations of psychotherapy and antidepressant drugs have, on average, equal expected outcomes. In the MCPI, the services of psychotherapists are classified in a separate stratum from antidepressant pharmaceuticals. Over the last decade psychotherapy-intensive treatments for depression have been reduced, and they have been replaced by either a combination of psychotherapy and pharmacological treatments or by pharmacological treatments alone. Although the movement away from psychotherapy-intensive procedures has, in many cases, reduced total costs per treatment episode, this cost reduction is not captured by current BLS procedures because the inputs come from distinct strata, each of which is priced separately and reweighted infrequently. Moreover, this problem would not be resolved by treating inpatient and outpatient hospitalizations as a combined stratum. BLS has been moving toward the pricing of an episode of an illness, rather than pricing medical inputs. For example, for those hospitals and physicians billing for services provided to Medicare beneficiaries, BLS is now collecting selected price quotes based on Medicare’s Diagnostic Related Group (DRG) classification scheme, a system that to some extent encompasses episodes of treatment. A major set of issues now facing BLS is how to broaden the new approach to encompass the entire treatment of medical conditions, not just hospital stays. One possibility is the following. First, the BLS could choose a subset of diagnoses or illnesses (perhaps between 15 and 40, depending in part on the costs involved in

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes analyzing data) from the International Classification of Diseases (ICD) (U.S. Department of Health and Human Services, 1980). Once the sample of diagnoses is identified, they can be matched with existing medical treatment data from large retrospective medical claims databases (e.g., those of medical insurers or payers) to monitor changes over time in the cost of a treatment episode. Retrospective medical claims data generally provide detailed information, by individual or family unit, including date of visit with the physician or other medical care professional, medical procedures provided, primary and secondary diagnoses, hospitalizations, dispensed medications, and the patient’s and insurer’s payments for each of these services. The diagnoses selected for pricing by the BLS could be chosen on the basis of the relative amounts spent on the disease so that, for example, heart attacks would be far more likely than conjunctivitis to be chosen, even though conjunctivitis has more entries than acute myocardial infarction in the ICD. When an individual receives treatments for several distinct but co-occurring illnesses, health services researchers frequently either assign each encounter entirely to the primary diagnosis for that encounter or split the utilization and costs equally among the various diagnoses for that encounter. Given the present state of information technology and medical claims processing, such a procedure could not be implemented in real time for an MCPI that must be published within a month of data collection. But currently it is feasible with about a 1-year lag, allowing the BLS to publish an experimental index on an annual basis. Because the BLS would probably find it too costly to produce this type of medical care price index each month, we recommend it consider producing an index based on a pricing of the sample of treatment episodes of distinct diagnoses. These diagnoses have two components—quantity weights and prices, just as with any other price index. For the monthly medical care index, the BLS could reprice the current set of specific items (e.g., anesthesia, surgery, medications), keeping quantity weights temporarily fixed. Then, at appropriate intervals, perhaps every year or two, the BLS should reconstruct the medical care index by pricing the treatment episodes of the 15 to 40 diagnoses in the manner described above. The index, therefore, might have a break when the set of diagnoses are repriced. There is the possibility that it will jump (up or down), particularly for medical conditions whose treatments have undergone rapid technological change. The panel recommends that BLS explore the possibility that these breaks may be large. A research program could retrospectively estimate the magnitude of such changes and determine what should be done (for example, smoothing the quantity changes based on past trends) if the breaks are expected to be large. At this point, we are agnostic concerning the most appropriate procedures and recommend that the BLS form a study group to examine these issues.

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes One point on which the panel is clear is that the Medical Care Price Index should not be linked in the usual way when the treatment episodes of diagnoses are repriced. That is, the index that results from the repricing of the 15 to 40 diagnoses should be linked to its previous value in levels, not in changes. The pricing of the set of diagnoses is the index. In other words, we advise that the index be the pricing of the treatments of the 15 to 40 diagnoses and that the index that results from the repricing of the components, holding the quantity weights constant, be used only for the high-frequency (monthly) publication requirement. Thus, we advise that the BLS price treatment episodes for selected diagnoses, independent of the actual treatment components. This method generalizes what the BLS is already doing in the context of using DRG reimbursements in hospitals for pricing hospital services for Medicare patients. Evaluating Quality Change A closely related but conceptually distinct issue facing the BLS is how to deal with variation in medical outcomes, which are due in part—but only in part—to changes in the quality of medical care goods and services delivered. (This issue is a component of the more general problem of how to adjust prices for quality change, discussed in Chapter 4.) Some changes in medical treatment outcomes are more easily measured than others. Consider changing mortality in the treatment of heart attacks. Cutler et al. (1998) have quantified mortality changes in the last few decades attributable to advances in the treatment of acute myocardial infarctions (heart attacks). Even if the entire change were due to higher-quality medical care, the measured improvement in life expectancy following heart attack treatment is not by itself sufficient to construct an outcomes-adjusted price index. Specifically, to calculate consumers’ willingness to pay for these changed outcomes and thus to evaluate consumers’ relative costs of reaching a given level of satisfaction over time, the change in life expectancy must be assigned some economic value. The marketplace does not provide direct evidence on the value that consumers place on improved life expectancy. Private- and public-sector decisions involving safety and compensation routinely place an implicit value on extending an individual’s life by an additional year. But an official medical price index that required BLS to assign an economic value to a year of additional life would likely provoke considerable controversy, in part because it would highlight consumer heterogeneity, raising profound issues of how a price index should deal with heterogeneous consumers’ tastes and incomes (see Chapter 8). When change in mortality is not the most appropriate indicator of changes in medical outcomes, the conceptual and measurement issues for the construction of an MCPI become even more complex. For the treatment of cataracts, Shapiro et al. (2001) document enormous cost-reducing productivity improvements over time from the surgical use of lasers (see also Shapiro et al., 1999). Here the

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes changed outcome is better eyesight, not extended mortality. But how does one place an economic value on additional years of better eyesight? In other cases, medical advances have no significant effect on medical outcomes for the medical problem being treated but are superior from the patient’s viewpoint because they involve fewer side effects. The introduction of non-sedating antihistamines has been significant, for example, not because the new generation of antihistamines is demonstrably more efficacious in reducing symptoms from allergies but because patients receiving the new antihistamines no longer have to face side effects from sedation—side effects that are important in an individual’s ability to function and perform normal activities of daily living. In these cases, narrowly defined medical outcomes might not be changed at all, but the quality of life for patients who receive the new treatment is much improved. How is BLS to evaluate such quality-of-life improvements from new medications? Health services researchers are currently attempting to measure the value of quality-of-life advances. They have constructed metrics such as QALYs (quality-adjusted life years) and DALYs (disability-adjusted life years). Although the conceptual foundations underlying such measures have been criticized, they are increasingly used within the health policy community. While the panel does not believe that BLS should use outcomes-adjusted price indexes based on QALY or DALY measures in its official price indexes in the near future, high priority should be given to research examining the feasibility and sensitivity of alternative ways of incorporating quality-of-life aspects of medical treatments, both at the BLS and elsewhere. THE DOMAIN OF CONSUMER HEALTH EXPENDITURES: EMPLOYERS’ HEALTH INSURANCE PAYMENTS The CPI is designed to price goods and services for which consumers make direct out-of pocket-expenditures. Because this definition does not include the employee health insurance premiums paid by employers or government payments for medical services (Medicare Part A and Medicaid), the weight given medical care items in the CPI (slightly less than 6%) is much smaller than the share of medical care expenditures in total personal consumption expenditures (about 17.6%). Under certain circumstances, these weighting procedures can result in biases. One possible bias will occur if the health insurance payment part of the MCPI moves differently from other components of the index (e.g., if prices of insurance-covered services, such as treatments for cancer, moved differently from uncovered services, such as cosmetic surgeries or nonreimbursed purchases of nonprescription drugs). The likely direction of such a bias is a priori unclear. Much more importantly, the panel concluded, is that including only patients’ out-of-pocket outlays inappropriately understates the medical care portion in the total CPI. Arguably, this biases the CPI as a whole. In the last 75 years, the MCPI

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes has generally risen more rapidly than the overall CPI. Thus, underweighting the share of MCPI in the total CPI has resulted in an understatement of the aggregate CPI, other things being equal (see Berndt et al., 2000). The argument for including both components of health care expenditures— those paid by employees and those paid by the employer—in the MCPI (and the CPI)—rests on the assumption that employees, if given the after-tax cash equivalent of employers’ contributions, would still spend most if not all of it on health insurance, paying a group rate for the insurance. Employers are generally indifferent as to how total labor compensation is split among wages and benefits, both of which are treated as (tax-deductible) expenses, although employers are obviously aware of the tax advantages for employees of employer-provided health benefits. Since the employer’s portion of health care insurance is a benefit provided to employees, and since employees can, to some extent, choose their employers on the basis of the full compensation package (wages, salaries, and health insurance benefits), it makes sense to incorporate the employer portion of health insurance in the CPI and MCPI weights, rather than treating it as a business expense unrelated to employee compensation or consumers’ expenditures (for further discussion, see Pauly, 1997; Summers, 1989; Gruber, 1994). However, if employer health insurance payments were included in the MCPI and CPI, some current uses of the CPI (e.g., deflating earnings, measuring total compensation, escalating wages, escalating social security benefits) would need to be reexamined carefully. Even if employer health insurance payments were not incorporated into the MCPI and CPI, the usefulness and appropriateness of the CPI for measuring movements in the cost of living for subpopulations could be substantially affected by major policy changes, such as a prescription drug benefit for elderly Medicare beneficiaries. The problem of matching CPI design to particular uses is discussed in greater detail in Chapter 7. Finally, because the CPI currently excludes from its domain government-provided goods and services, no weight is assigned for Medicaid or Medicare Part A services (hospitalizations and related physician services). An important consequence of this omission is that there is no overall price index for medical care—consisting of medical care expenditures from patients’ out-of-pocket payments, private insurers, and government insurers (Medicare and Medicaid). To inform public policy discussion and to evaluate the performance of the U.S. medical care sector, a comprehensive MCPI is needed that encompasses purchases from all payers—governments, private third-party insurers, and consumers. DIRECT PRICING OF HEALTH INSURANCE As outlined above, BLS currently reallocates consumers’ payments for private health insurance and Medicare Part B expenditures back to the five MCPI components. In this indirect pricing of health insurance, the BLS encounters

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes significant difficulty in obtaining reliable separate price quotes for, say, physicians’ services and prescription drugs when they are purchased directly by consumers as opposed to when they are paid by third-party insurers. In the medical care sector, the “law of one price” does not hold, making the BLS’s task of obtaining reliable distinct price quotes a challenging one. Recent improvements in information technology and medical care claims processing have greatly expanded the scope of calculations that can be carried out by health insurance actuaries. Stimulated by these information technology and actuarial developments, as well as by the practical difficulties in obtaining accurate and reliable price quotes from third-party payers, the BLS is now examining whether the indirect method can be replaced by direct pricing of health insurance. Such a change would eliminate the need for price quotes from third-party payers for their purchases of physician services, hospital services, and prescription drugs. Implicitly, such direct pricing of health insurance policies would be based on the reasonable assumption that prices paid by insurers for physician services, hospital services, and prescription drugs are reflected in the health insurance premiums they charge. Although the panel had not initially intended to consider direct pricing of medical insurance policies, the BLS raised this issue in its discussions with panel members, and so we address it here in a preliminary way. Although direct pricing of health insurance could in principle obviate the need for obtaining hospital, physician, and prescription drug price quote information from insurers, the difficult issues of adjusting properly for changing quality and health outcomes remain. Direct pricing of health insurance policies does not address issues of adjusting medical care prices for quality changes. Those problems will be present whether direct or indirect pricing of health insurance takes place. One major reason for year-to-year movement in health insurance premiums is that the mix of covered risks changes. This mix of covered risks reflects variation in the incidence of illnesses (e.g., AIDS or a flu epidemic), the age-sex mix of the insured population, and changes in the selectivity of coverage (i.e., the mix of individuals who have chosen a particular health insurance policy). The health economics literature is rife with examples of how moral hazard, adverse selection, and adverse retention affect costs (see, e.g., Altman et al., 1998). The presence of these phenomena significantly complicates the task of pricing health insurance. In theory one could use hedonic pricing techniques (discussed in Chapter 4) to control for variations in health insurance benefits offered and for the age-sex mix of the covered population. In practice, it would be difficult if not impossible to adjust health insurance premium variations for changes in the health status of people who have selected to enroll in that plan. Whether actuarial procedures have improved sufficiently to be able to generate accurate quotes for a frozen or fixed population is unclear to the panel. Moreover, since the Laspeyres index methodology involves fixing product bundles at base-year levels, with base years

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes changing say every 3-5 years, actuaries will likely find it very difficult to generate hypothetical quotes for old policies with obsolete fixed populations, given that insurers’ policies and enrollees have changed. Even more problematic is the issue of how actuarial quotes would take into account the premium effects of variations in the health status of those selecting into (and leaving) a particular policy’s enrollee population. Such data are typically not observable. The panel appreciates the difficulties faced by the BLS in obtaining third-party price quotes of insurers’ reimbursements for physician and hospital services and prescription drugs and in creating diagnostic-specific episode treatment price indexes. Replacing indirect pricing with the direct pricing of health insurance policies offers very attractive possibilities, and we believe that this direct pricing alternative merits close scrutiny. But we also strongly recommend that no change from indirect to direct pricing be made without extensive experimentation and reliability assessment that includes consultation with leading health economists, actuaries, clinicians, and health insurance specialists. RECOMMENDATIONS Pricing Diagnostic Treatments The changes that the BLS implemented in 1998 regarding the MCPI reduce the bias caused by the aggregation of goods and services to levels that do not allow for substitution among alternative medical treatments. BLS should continue its efforts to eliminate this bias. The major change BLS implemented in 1998 concerned aggregating inpatient and outpatient hospital services into a single stratum, to allow for substitution between them, but that is only one area of potential bias from input substitution. The panel favors the use of diagnosis-based rather than input-based measures wherever this is feasible. The advantages of diagnosis-based methods have been highlighted in a number of research papers, of which the treatment for depression is only one example. Thus the panel recommends using a disease- or diagnosis-based unit for pricing rather than the current “industry” or medical care strata. This recommendation does not imply (or require) outcome-based measures. It implies only that inputs be priced and aggregated by the changing treatment mix for a particular diagnosis, rather than by the traditional BLS medical care strata. Recommendation 6-1: BLS should select about 15 to 40 diagnoses from the ICD (International Classification of Diseases), chosen randomly in proportion to their direct medical treatment expenditures and use information from retrospective claims databases to identify and quantify the inputs used in their treatment and to estimate their cost. On a monthly basis, the BLS could reprice the current set of

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes specific items (e.g., anesthesia, surgery, medications), keeping quantity weights temporarily fixed. Then, at appropriate intervals, perhaps every year or two, the BLS should reconstruct the medical care index by pricing the treatment episodes of the 15 to 40 diagnoses— including the effects of changed inputs on the overall cost of those treatments. The frequency with which these diagnosis adjustments should be made will depend in part on the cost to BLS of doing so. The resulting MCPI price indexes should initially be published on an experimental basis. The panel also recommends that the BLS appoint a study group to consider, among other things, the possibility that the index will “jump” at the linkage points and whether a prospective smoothing technique should be used. Including Employers’ Health Insurance Payments Currently, CPI weights only reflect consumers’ out-of-pocket expenditures on medical care, including the cost of insurance. As discussed above, this leads to an underestimation of the medical care category of the CPI. Given the uses to which the flagship CPI is put, it is not obvious that expanding the medical care category to include more types of expenditures is advisable. However, a more broadly based measure of the changing cost of medical would be valuable for a wide range of policy purposes. Recommendation 6-2: BLS should include the portion of health insurance paid for by employers in one version of the CPI, perhaps calling it an “expanded-scope medical CPI.” Because many commonly used income measures exclude employer-provided benefits and because the Consumer Expenditure Survey is based only on out-of-pocket expenditures, the original conception of the MCPI domain should still be maintained in constructing the traditional (flagship) CPI. The panel also recommends examining the practicality of including other employer-paid employee benefits (e.g., dental and life insurance and cafeteria plans) in the expanded-scope CPI. Expanding the Domain of the MCPI To inform public policy discussions and to evaluate the performance of the U.S. health care sector, a medical care price index that encompasses purchases from all payers—governments, private third-party insurers, and consumers—is needed. Whether such an index is best constructed by the BLS, the Bureau of Economic Analysis, some other government agency such as the Centers for Medicare and Medicaid Services, or a nongovernmental organization is unclear. What

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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes is clear is that a medical care price index encompassing all payers for medical services should be computed and published for public consumption. Recommendation 6-3: A task force should be convened by the BLS, in collaboration with the Centers for Medicare and Medicaid Services and other appropriate agencies, to implement construction and publication of a total medical care expenditure price index, encompassing purchases from all health care payers—governments, private third-party insurers, and consumers. Pricing Outcomes Rather than Inputs The most difficult issue in the construction of the MCPI concerns adjustments for quality change. New treatments extend life and make the quality of life better. The panel believes that an outcomes-based measure is in principle superior to an input-based measure, but we recognize the formidable measurement challenges and do not know how best to proceed. This area is new and requires considerably more research, much of it interdisciplinary. After BLS has produced the experimental expanded-scope MCPI recommended above, BLS can consider whether, how, and why the outcomes of the treatments for those diagnoses are changing over time and finally consider how outcome changes should best be evaluated in computing a quality-adjusted medical care price index.