ACCOUNTING FOR HEALTH AND HEALTH CARE

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ACCOUNTING FOR HEALTH AND HEALTH CARE APPROACHES TO MEASURING THE SOURCES AND COSTS OF THEIR IMPROVEMENT Panel to Advance a Research Program on the Design of National Health Accounts Committee on National Statistics Division of Behavioral and Social Sciences and Education

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THE NATIONAL ACADEMIES PRESS 500 Fifth Street, N.W. Washington, DC 20001 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This study was supported by contract number N01-OD-4-2139 between the National Academy of Sciences and the U.S. Department of Health and Human Services. Support for the work of the Committee on National Statistics is provided by a consortium of federal agencies through a grant from the National Science Foundation (award number SES-0453930). Any opinions, find- ings, conclusions, or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the view of the organizations or agencies that provided support for this project. Library of Congress Cataloging-in-Publication Data National Research Council (U.S.). Panel to Advance a Research Program on the Design of National Health Accounts. Accounting for health and health care : approaches to measuring the sources and costs of their improvement / Panel to Advance a Research Program on the Design of National Health Accounts, Committee on National Statistics, Division of Behavioral and Social Sciences and Education, National Research Council. p. ; cm. Includes bibliographical references. ISBN 978-0-309-15679-0 (pbk.) — ISBN 978-0-309-15680-6 (pdf) 1. Medical care, Cost of—United States. I. Title. [DNLM: 1. Accounting—United States. 2. Health Expenditures—United States. 3. National Health Programs—United States. 4. Public Health—economics—United States. W 74 AA1] RA410.53.N396 2010 338.4’33621—dc22 2010028929 Additional copies of this report are available from The National Academies Press, 500 Fifth Street, NW, Lockbox 285, Washington, DC 20055; (800) 624-6242 or (202) 334-3313 (in the Washington metropolitan area); Internet, http://www.nap.edu. Copyright 2010 by the National Academy of Sciences. All rights reserved. Printed in the United States of America Suggested citation: National Research Council. (2010). Accounting for Health and Health Care: Approaches to Measuring the Sources and Costs of Their Improvement. Panel to Advance a Research Program on the Design of National Health Accounts, Committee on National Statis- tics. Division of Behavioral and Social Sciences and Education. Washington, DC: The National Academies Press.

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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Ralph J. Cicerone is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Charles M. Vest is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examina - tion of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Harvey V. Fineberg is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy’s purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering com- munities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Ralph J. Cicerone and Dr. Charles M. Vest are chair and vice chair, respectively, of the National Research Council. www.national-academies.org

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PANEL TO ADVANCE A RESEARCH PROGRAM ON THE DESIGN OF NATIONAL HEALTH ACCOUNTS JOSEPH P. NEWHOUSE (Chair), Division of Health Policy Research and Education, Harvard University DAVID M. CUTLER, Department of Economics, Harvard University DENNIS G. FRYBACK, Department of Population Health Sciences, University of Wisconsin, Madison ALAN M. GARBER, Department of Veterans Affairs, Palo Alto Health Care System, and School of Medicine, Stanford University EMMETT B. KEELER, RAND Graduate School, Santa Monica, CA ALLISON B. ROSEN, School of Public Health, University of Michigan JACK E. TRIPLETT, Brookings Institution, Washington, DC CHRISTOPHER D. MACKIE, Study Director MICHAEL J. SIRI, Program Associate v

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COMMITTEE ON NATIONAL STATISTICS 2009-2010 WILLIAM F. EDDY (Chair), Department of Statistics, Carnegie Mellon University KATHARINE G. ABRAHAM, Joint Program in Survey Methodology, University of Maryland ALICA CARRIQUIRY, Department of Statistics, Iowa State University WILLIAM DuMOUCHEL, Phase Forward, Inc., Waltham, MA JOHN HALTIWANGER, Department of Economics, University of Maryland V. JOSEPH HOTZ, Department of Economics, Duke University KAREN KAFADAR, Department of Statistics, Indiana University SALLIE KELLER, Science Technology Policy Institute, Washington, DC LISA LYNCH, Heller School for Social Policy and Management, Brandeis University DOUGLAS MASSEY, Department of Sociology, Princeton University SALLY C. MORTON, Department of Biostatistics, University of Pittsburgh JOSEPH P. NEWHOUSE, Division of Health Policy Research and Education, Harvard University SAMUEL H. PRESTON, Population Studies Center, University of Pennsylvania HAL STERN, Department of Statistics, University of California, Irvine ROGER TOURANGEAU, Joint Program in Survey Methodology, University of Maryland, and Survey Research Center, University of Michigan ALAN ZASLAVSKY, Department of Health Care Policy, Harvard Medical School CONSTANCE F. CITRO, Director vi

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Preface It has become trite to observe that increases in health care costs have become unsustainable. How best for policy to address these increases, however, depends in part on the degree to which they reflect changes in the quantity of medical ser- vices as opposed to increased unit prices of existing services. And an even more fundamental question is the degree to which the increased spending actually has purchased improved health. This report addresses both of these issues. The government agencies respon - sible for measuring unit prices for medical services have taken steps in recent years that have greatly improved the accuracy of those measures. Nonetheless, this report has several recommendations aimed at further improving the price indexes. Because medical care is such a large part of the economy, inaccurate medical price indexes can cause significant inaccuracies in overall measures of inflation. And accurate measures of inflation matter a great deal for policy: they affect the tightness of monetary and fiscal policy; they affect government budgets, because about a third of the federal budget is indexed for inflation; and inaccurate price indexes by definition lead to inaccurate measures of productivity. Measuring the price of medical services well is difficult, but the ultimate question is the degree to which monies spent on medical services, as well as other policy measures, affect health outcomes. This question is much harder than measuring prices, but the panel recommends some steps it thinks will improve the nation’s capacities in this domain. This report has been reviewed in draft form by individuals chosen for their diverse perspectives and technical expertise, in accordance with procedures approved by the Report Review Committee of the National Research Council vii

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viii PrefACe (NRC). The purpose of this independent review is to provide candid and critical comments that will assist the institution in making its published report as sound as possible and to ensure that the report meets institutional standards for objectiv- ity, evidence, and responsiveness to the study charge. The review comments and draft manuscript remain confidential to protect the integrity of the deliberative process. The panel wishes to thank the following individuals for their review of this report: Thomas E. Getzen, Fox School of Business, Temple University; Paul B. Ginsburg, Center for Studying Health System Change, Washington, DC; Sherry Glied, Department of Health Policy and Management, Mailman School of Public Health, Columbia University; Dale W. Jorgenson, Department of Econom- ics, Harvard University; J. Steven Landefeld, Bureau of Economic Analysis, U.S. Department of Commerce; Mary O’Mahony, National Institute of Economic and Social Research (UK) and University of Birmingham; and Michael Stoto, Health Systems Administration and Population Health, Georgetown University School of Nursing and Health Studies. Although the reviewers have provided many constructive comments, and improved the content of the report a great deal, they were not asked to endorse the conclusions or recommendations; nor did they see the final draft of the report prior to its release. The review of this report was overseen by Katharine G. Abraham, Joint Program in Survey Methodology, University of Maryland, and Charles E. Phelps, university professor and provost emeritus, University of Roch- ester. Appointed by the NRC’s Report Review Committee, they were responsible for making certain that an independent examination of this report was carried out in accordance with institutional procedures and that all review comments were carefully considered. Responsibility for the final content of this report rests entirely with the authoring panel and the institution. Many others generously gave of their time to present at meetings and to answer questions from panel members and staff, thereby helping the panel to develop a clearer understanding of key issues relevant to the development of medical care and health accounting systems. The panel especially thanks the National Institute on Aging (NIA) Division of Behavioral and Social Research, which supported the work of the panel as it wrestled over many months with the difficult issues in conceptualizing health and medical care accounts and moving toward their development, and the federal statistical agencies, which allowed the panel access to key personnel with extensive expertise about various data programs. Richard Suzman and John Haaga of NIA provided insights and guidance as project initiators. Perspectives from other interested agencies were expertly supplied by Todd Caldis, Cathy Cowan, Jonathan Cylus, Mark Freeland, Stephen Stephen Heffler, Arthur Sensenig, and Andrea Sisko of the Centers for Medicare of & Medicaid Services (U.S. Department of Health and Human Services); by Ralph alph Bradley, John Greenlees, Michael Horrigan, John Lucier, Robert McClelland, Bonnie Murphy, and Roslyn Swick of the Bureau of Labor Statistics (U.S. Department of Labor); by Ana Aizcorbe, Dennis Fixler, and J. Steven Landefeld

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ix PrefACe of the Bureau of Economic Analysis (U.S. Department of Commerce); by Jessica Banthin, Yen-Pin Chiang, Steven Cohen, and William Lawrence of the Agency for Healthcare Research and Quality (U.S. Department of Health and Human Ser- vices); by Linda Bilheimer and Christine Cox of the National Center for Health Statistics (Centers for Disease Control and Prevention, U.S. Department of Health and Human Services); by Theodore Stefos of the U.S. Department of Veterans Affairs; and by Anne Hall of the Board of Governors of the Federal Reserve. The panel also learned a great deal from hearing about health data efforts by government agencies and researchers abroad. For their participation and willing - ness to travel great distances to do so, the panel thanks John Goss, Australian Institute of Health and Welfare; Sandra Hopkins, Organisation for Economic Co- operation and Development Health Division; Mary O’Mahony, National Institute of Economic and Social Research (UK) and University of Birmingham; and Michael Wolfson, Statistics Canada. On the home front, the panel could not have conducted its work without an excellent and well managed NRC staff. In that regard, it appreciates the support of Constance Citro, director of the Committee on National Statistics; Michael Siri, program associate; and Christopher Mackie, the panel’s study director. Most importantly, I thank the members of the panel for their hard work. This report reflects the collective expertise and commitment of the individual members of the panel. All participated in the panel’s many meetings and in drafting mate - rial for discussion and, ultimately, for the report itself. Each member brought a critical perspective, and our meetings provided many opportunities for panel members to learn from one another. Joseph P. Newhouse, Chair Panel to Advance a Research Program on the Design of National Health Accounts

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Contents ACRONYMS AND ABBREVIATIONS xv ABSTRACT xx SUMMARY 1 1 HEALTH DATA AND HEALTH POLICY 17 1.1. The Purpose and Value of an Expanded System of National Health Accounts, 17 1.2. Report Audience, Report Structure, 23 2 MEDICAL CARE ACCOUNTS AND HEALTH ACCOUNTS: STRUCTURE AND DATA 27 2.1. Links to Economic Accounts, 27 2.2. Medical Care and Health Accounts Contrasted, 28 2.3. Structure and Data for a Medical Care Account, 36 2.4. Inputs to the Medical Care Account, 40 2.5. Measuring Output in the Medical Care Account, 52 Annex: Product Detail for Electromedical Equipment Data, 63 3 ALLOCATING MEDICAL EXPENDITURES: A TREATMENT-OF-DISEASE ORGANIZING FRAMEWORK 71 3.1. Motivation for Disease-Based Accounts, 71 3.2. Cost-of-Illness Estimation, 73 xi

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xii CONTENTS 3.3. onceptual Framework for Disease-Based National Health C Accounts, 77 3.4. Reconciliation of Microdata to NHEA, 78 3.5. Disease Classification Schema, 81 3.6. lternative Approaches to Allocating Medical Care A Expenditures, 84 4 MEASURING PRICES AND QUANTITIES OF MEDICAL CARE: IMPROVING MEDICAL CARE PRICE INDEXES 95 4.1. lternative Estimations of Quantity Growth in Medical Care A Services: The Role of Price and Quantity Indexes, 95 4.2. rice Indexes for Medical Care: The Producer Price Indexes P and Their Use in BEA Accounts, 100 4.3. hat Is Needed in a Price Index for Medical Care?: Evaluation W of the PPI, 104 4.4. hen Treatments Move Across Industries or Across W Establishments, 109 4.5. nit Values Compared with Specification Pricing, 113 U 4.6. he Way Forward: Strategies for Improving Medical Care T Deflators, 116 5 DEFINING AND MEASURING POPULATION HEALTH 119 5.1. Introduction, 119 5.2. ALY and Quality-Adjusted Life Expectancy as a Summary Q Measure of Current Health, 127 5.3. s Measuring Current Health by QALE Enough?: Adding Risk I Factors to the Data Set, 136 5.4. ow Can HRQoL and Risk Factor Data Be Collected for a H National Account?, 139 5.5. A Note on Valuing Health Increments, 140 6 LINKING POPULATION HEALTH TO THE ARRAY OF HEALTH INPUTS 143 6.1. Attribution of Health Effects to Inputs, 144 6.2. Medical Care Expenditures and Health, 146 6.3. Nonmedical and Nonmarket Inputs to Health, 149 6.4. Disease Modeling, 154 6.5. ypes of Health Data and Statistics and Challenges to Their T Improvement, 163 6.6. Organizing the Data Infrastructure, 175 BIBLIOGRAPHY 187

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xiii CONTeNTS APPENDIXES A The Potential Role of Various Data Sources in a National Health Account 205 B Biographical Sketches of Panel Members and Staff 211

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Acronyms and Abbreviations ACES Annual Capital Expenditures Survey ACG adjusted clinical groups ACS American Community Survey ADL activities of daily living AHIP America’s Health Insurance Plans AHRQ Agency for Healthcare Research and Quality APG Ambulatory Patient Groups ASM Annual Surveys of Manufactures ATUS American Time Use Survey BEA Bureau of Economic Analysis BLS Bureau of Labor Statistics BMI body mass index BRFSS Behavioral Risk Factor Surveillance System CAT computerized adaptive test CCS Clinical Classification Software CDC Centers for Disease Control and Prevention CDM chronic disease model CES Current Employment Survey CIHI Canadian Institute for Health Information CIR Current Industrial Reports CMS Centers for Medicare & Medicaid Services CNSTAT Committee on National Statistics COI cost of illness xv

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xvi ACrONYMS AND ABBreVIATIONS CPI Consumer Price Index CPS Current Population Survey CRG clinical risk grouping CRIW Conference on Research in Income and Wealth DALY disability-adjusted life year DCG diagnostic cost groups DoD U.S. Department of Defense DRG diagnostic-related groups system EKG electrocardiograph EMG electromyography EPA U.S. Environmental Protection Agency ER emergency room ETG episode treatment groups EU European Union FRB Federal Reserve Board GDP gross domestic product HCPCS Healthcare Common Procedure Coding System HCUP Healthcare Cost and Utilization Project HHS U.S. Department of Health and Human Services HIPAA Health Insurance Portability and Accountability Act HIV human immunodeficiency virus HIV/AIDS human immunodeficiency virus/acquired immunodeficiency syndrome HOS Medicare Health Outcomes Survey HPV human papillomavirus HRQoL health-related quality of life HRS Health and Retirement Study HUI2 Health Utilities Index Mark 2 HUI3 Health Utilities Index Mark 3 IADL instrumental activities of daily living ICD-9 International Statistical Classification of Diseases and Related Health Problems, ninth revision ICD-9-CM International Classification of Diseases, ninth revision, Clinical Modification ICD-10 International Statistical Classification of Diseases and Related Health Problems, tenth revision ICT information and communications technology

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xvii ACrONYMS AND ABBreVIATIONS IOM Institute of Medicine IPI International Price Index IRS U.S. Internal Revenue Service ISR University of Michigan Institute for Social Research IT information technology JCUSH Joint Canada/United States Survey of Health KLEMS inputs for medical services that go into a medical care account: capital services (K); labor services—the vector of all labor inputs, from surgeons to janitors (L); energy (E); intermediate or purchased materials, which, in medical care–providing industries, includes pharmaceuticals used in hospitals and clinics (M); and purchased services (S) LDC less-developed countries LE life expectancy LP labor productivity growth MC marginal cost MCBS Medicare Current Beneficiary Survey MDC major diagnostic category MedPAC Medicare Payment Advisory Commission MEG medstat episode groups MEPS Medical Expenditure Panel Survey MFP multifactor productivity MI myocardial infarction MRI magnetic resonance imaging NAICS North American Industry Classification System NAPCS North American Product Classification System NBER National Bureau of Economic Research NCHS National Center for Health Statistics NCS National Comorbidity Survey NCS-R National Comorbidity Survey-Replication NCVHS National Committee on Vital and Health Statistics NDC National Drug Code NDI National Death Index NEFS National Epidemiologic Followup Study NHA National Health Account NHANES National Health and Nutrition Examination Survey NHCS National Health Care Survey NHEAs National Health Expenditure Accounts

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xviii ACrONYMS AND ABBreVIATIONS NHHCS National Home and Hospice Care Survey NHIS National Health Interview Survey NHMS National Health Measurement Study NHSDA National Household Survey on Drug Abuse NIA National Institute on Aging NIESR National Institute of Economic and Social Research (UK) NIH National Institutes of Health NIPAs National Income and Product Accounts NIS Nationwide Inpatient Sample NMES National Medical Expenditures Survey NNHS National Nursing Home Survey NOMESCO Nordic Medico-Statistical Committee NRC National Research Council NSAS National Survey of Ambulatory Surgery NSF National Science Foundation OECD Organisation for Economic Co-operation and Development OTC over the counter PCE personal consumption expenditures PHC personal health care PPI Producer Price Index PPMS Provider Performance Measurement System PROMIS Patient-Reported Outcomes Measurement and Information System QALE quality-adjusted life expectancy QALY quality-adjusted life year QOL quality of life QWB-SA Quality of Well-Being Scale, self administered R&D research and development RRU relative resource use SAMHSA Substance Abuse and Mental Health Services Administration SEER Surveillance, Epidemiology, and End Results Program SEER-CMHSF Surveillance, Epidemiology, and End Results-Continuous Medicare History Sample File SES socioeconomic status SHA system of health accounts SID State Inpatient Database

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xix ACrONYMS AND ABBreVIATIONS TFP total factor productivity USVEQ U.S. Valuation of the EQ-5D VA U.S. Department of Veterans Affairs VAS visual analog scale VBID value-based insurance design WHO World Health Organization WHS World Health Survey

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Abstract In order for policy makers to pursue informed actions to enhance efficiency of the nation’s approach to medical and health care—whether through carefully targeted cost reductions or improved performance—a redesigned data system for tracking resource productivity is needed. This report lays out strategies for advancing this objective. Specifically, the panel recommends that work proceed on two projects that are distinct but complementary in nature: the first involves reformulating the economic accounting of inputs and outputs for the medical care sector; the second involves developing a data system that coordinates population health statistics with information on the determinants of health. Though the scope of activities required for each of these two projects is different, both economic problems involve identifying units of measurement for which meaningful prices and quantities can be attached so that returns to investments in health can be estimated, tracked over time as the quality of care and the composition of the population change, and compared under alternative planning scenarios. Inputs to medical care include capital, labor, energy and materials, research and development, and the like. The report gives considerable attention to how expenditures on these inputs are to be allocated in an accounting structure, with the panel recommending that a substantial portion can be framed in terms of treatments for diseases and other well-defined conditions. In principle, this struc - ture allows the value of the output of medical care to consumers (patients) to be adjusted to reflect changing quality of outcomes. Inputs to health, the output of a broader accounting concept, include medical care but also many other factors. An essential component of this kind of account—and, more immediately, a data system that could be used in its development—involves selecting a summary measure of population health, and xx

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xxi ABSTrACT the report assesses the options. Though it involves very long-term commitments, efficient management of health care resources requires developing a more com - plete understanding than currently exists of the links between population health and the array of health inputs. Thus, the report discusses data needs and issues that are confronted in research seeking to attribute health effects to both medical and nonmedical (as well as market and nonmarket) inputs to health.

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