Price Indexes - Health Care

More than two decades ago a well-known study provided evidence from heart attack treatments suggesting that prices in medical care were actually declining, when appropriately adjusted for quality. Our paper revisits this subject looking at a large number of conditions and more recent and more comprehensive data sources to compare alternative methods of quality adjustment. A method based on utility theory produces the most robust and accurate results, while the alternative methods used in recent work overstate inflation. Based on claims data for three medical conditions as well as data on medical innovations from over 7,000 cost-effectiveness studies spanning all major condition categories and types of treatment, we find that, when properly adjusted for quality, declining prices from innovation are a prevalent feature of this sector. These findings have important implications for the measurement of medical care output and productivity.

We examine the impact of Medicare Part D on mortality for the population over the age of 65. We identify the effects of the reform using variation in drug coverage across counties before the reform was implemented. Studying mortality rates immediately before and after the reform, we find that cardiovascular-related mortality drops significantly in those counties most affected by Part D. Estimates suggest that up to 26,000 more individuals were alive in mid-2007 because of the Part D implementation in 2006.

In this paper, we explore the importance of shifts in treatments for explaining increases in the cost of health care services. Using a large database of health insurance claims for sample patients, we find that there have been shifts in treatment intensity that have an important effect on costs and that, on average, those treatment shifts served to lower the cost of treating disease. These costs savings appear to be numerically important and pervasive. Our results lend support to earlier work that found these effects for a set of important conditions: heart attacks, cataract, and depression.

Appendix (XLS)