fraught with difficult problems of data availability, concept, and statistical method. In Chapter 4 the panel considers in detail the proper balance between the pursuit of improved and expanded direct quality measurement and a rigorous program of selection, testing, and experimentation before implementation.

Medical Care

Pricing medical care embodies the most difficult quality-related problems associated with constructing a cost-of-living index, and the panel gives it special attention. The health services sector is a highly complex industry characterized by rapid advances in technology and a continuing stream of new techniques, propelled in part by substantial federal support for research. The industry also possesses a number of special attributes that make the quantity and quality of its output difficult to define. Complications that BLS must deal with include the high variation in prices paid by consumers for equivalent services, the definition of the medical “good” being purchased (e.g., is it a procedure or treatment or the medical inputs?), the involvement of insurers and government in transactions, and the pricing of risk.

Some important improvements in accounting for changes in the quality of medical care have recently been introduced by redefining the units of service for which prices are collected in the CPI. For example, to price hospital services, the BLS has begun to collect prices for the treatment of particular diagnoses or illnesses in place of the earlier practice of pricing inputs, such as days in the hospital or operating room charges. This has led to substantial improvement in the ability of the index to capture advances in medical technology that reduce the cost of treating a given illness. Another major improvement has been in the BLS treatment of generic drugs, in effect counting the difference between their price and those of the same-molecule branded drugs as a price reduction.

These improvements, however, do not directly deal with advances in the quality of a given treatment or procedure, that is, changes in ultimate outcomes— lower mortality and morbidity, fewer undesirable side effects, less pain or trauma, a better quality of life, and so forth. (We touched on the conceptual aspects of this issue above.) To pursue the cost-of-living concept in the pricing of medical care to its logical conclusion, one would need to put a monetary value on how the outcomes of specific medical procedures affect consumer well-being. This obviously poses enormous conceptual and measurement issues. In Chapter 6 the panel considers these conceptual and measurement issues and makes a number of recommendations about the treatment of medical care in the CPI.


In the marketplace, there is rarely a sharp dividing line separating a new good from an existing one whose quality has been improved. As described above, monthly BLS price collection procedures continually lead to the pricing of re-

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