May 19, 2017

Researchers studying the hot topic of rising health care costs face a complicated choice: which price index to use.

There’s an array of government inflation indexes that differ in scope, formula and data sources. Choosing the right one can be critical to your research findings.

To help researchers make the best decision, BEA’s Abe Dunn compared the properties of major price indexes. No single index is the gold standard, because the best choice depends on your research question, according to Dunn and his co-authors, Scott D. Grosse of the Centers for Disease Control and Prevention and Samuel H. Zuvekas of the Agency for Healthcare Research and Qualtity.

Their review offers guidance for researchers studying health care costs or spending.

When adjusting for general inflation throughout the economy, the authors recommend using either BEA’s Personal Consumption Expenditures (PCE) index or its broader gross domestic product (GDP) chain-type price index. The two indexes track each other closely. Another useful tool is BEA’s price index for gross domestic purchases, which differs from GDP by including imported goods and services, while excluding exports.

When adjusting for inflation in overall medical spending, the authors suggest using the PCE health-by-function price index from BEA or the Personal Health Care (PHC) deflator calculated by the Centers for Medicare and Medicaid Services. Although there are minor differences in the way these two indexes measure health care consumption, they show nearly identical inflation rates.

The Bureau of Labor Statistics’ Consumer Price Index has an overall medical care component, referred to as the MCPI, that is valuable for focusing on consumers’ out-of-pocket expenses. Because the MCPI excludes major types of payers, such as Medicaid, it varies significantly from the track of BEA’s PCE health-by-function price index and the Centers for Medicare and Medicaid Services’ PHC price index.

As part of BEA’s Health Care Satellite Account, BEA developed a new experimental health care price index called the Medical Care Expenditure (MCE). This index looks at the costs of treating patients for specific diseases or medical conditions. That’s in contrast to traditional price indexes that measure the prices of goods and services, such as prescription drugs or doctor’s office visits. The MCE price index also may be used by researchers who are interested in tracking the overall costs of treating patients.

Dunn offers this guidance in selecting the right price index for your project:

  • When adjusting for general inflation, BEA’s PCE price index is more suitable if you are focused on consumers. Use BEA’s GDP chain-type price index when you need to capture broader spending, including that by businesses and government.
  • For medical price changes, use either BEA’s PCE health-by-function price index or the Centers for Medicare and Medicaid Services’ PHC deflator.
  • To convert average consumer out-of-pocket health care expenditures from one year to another, consider the medical care component of the Bureau of Labor Statistics’ Consumer Price Index (MCPI).
  • Since some payers are excluded from the MCPI, it may be inappropriate for inflation adjustment if you’re studying all types of payers. Payments by employers, Medicaid and Medicare Part A aren’t included in the MCPI.
  • To adjust estimates of costs of inpatient services from different years, the Bureau of Labor Statistics’ Producer Price Index for inpatient services appears to be the best option.
  • BEA’s Medical Care Expenditure price index provides a measure of the average cost per patient, rather than the average cost for specific services. Whether the MCE price index is the more appropriate deflator depends on your particular research application.

For more detail about the various price indexes and their uses for health research, see the paper, “Adjusting Health Expenditures for Inflation: A Review of Measures for Health Services Research in the United States,” on