National Health Accounts

1. National Health Accounts Joseph P. Newhouse Harvard University

2. Main Points • Should account for non-market inputs, especially time • Comparisons of spending across time and space can yield useful inferences • Decomposing change in medical spending into price and quantity requires measurement of output by episode

3. A Caveat • My experience is with the US accounts, and my examples reflect a developed country bias • But I think the conclusions apply generally

4. Non-Market Transactions • The accounts measure goods and services traded in the market • True of both health accounts and national income and product accounts (NIPA) • Latter often used to measure changes in well being

5. Well Being and Non-Market Transactions • Time is an important input into health care, but time has an opportunity cost that is not captured in the accounts

6. Time as a Complement • Time is sometimes a complement to market inputs • Own time spent traveling to and receiving care • Time of family members assisting others • Mother taking child to physician • Time spent recovering from illness (“Take 2 aspirin and go to bed”)

7. Time Making Production of Health More Efficient • This is a role usually assigned to education • But people spend time trying to get more health out of a given set of market inputs • For example, time spent talking with others about providers of care or otherwise seeking information • Time spent gathering information on health effects of lifestyles; health sections in the press

8. Time as a Substitute for Market Inputs • Informal care of frail elderly • Health promotion; wellness (e.g., exercise) • Difficult boundary lines here (e.g., sleep)

9. Measuring Time Used in Production of Health • Suppose one wanted to add time to a satellite account; this would require separate time use survey • Issues of valuation; persons not working • Issues of boundaries • Joint production • Exercise might have other benefits

10. Conclusion on Time • The accounts understate by an unknown, but probably non-trivial amount the resources devoted to health care • Recent NAS publication on satellite accounts including time inputs; see next slide (book also covers medical price indices)

11. A Recommended Book Beyond the Market: Designing Non-Market Accounts for the United States; Washington: National Academy Press, 2005.

12. Usefulness of Accounts • Some would cite comparing levels of spending across countries • Sometimes such comparisons have arguably had an effect; e.g., UK decision to increase spending to OECD average

13. Rates of Change • Within country one can not only calculate share of GDP (already available from NIPA), but how rate of change varies among health care sectors • For example, share of spending going to pharmaceuticals • But public sector spending known from budgets

14. Comparative Rates of Change • I have found comparative rates of change useful • I am struck by the similarity of rates of change both across countries and over time

15. Annual Real % Cost Increase per Capita, G-7*, 1960-2002* Average=4.9% *Italy missing data before 1990. Germany 1970-2002, Japan 1960-2001. Source: OECD Health Data 2004 and US GDP deflator.

16. Similar Increase in Real US Annual $/Person by decade Medicare and Medicaid enacted Average = 4.4% Managed care Sources: CMS National Health Accounts. Newhouse, JEP 1992(3), Stat Abst, Ec Rpt Pres. GDP Deflator.

17. What Do These Data Tell Us? • Any explanation of the cost increase in medical care needs to hold across countries and decades • Differences among countries in financing institutions are not the explanation • Costly advances in medicine explain much of the increase and probably will continue Costly advances: Newhouse, Jnl Econ Perspectives, 1992.

18. The Increase Was Probably Worth It • The roughly similar rates of increase everywhere are a crude market test • In US case confirmed by Cutler: CVD and neonatal mortality advances alone can justify the entire US $ increase post 1950 • Nordhaus: Value of US Δlife expectancy 1900-95  Value of ΔNational Income Cutler, Your Money or Your Life, Oxford, 2004; Nordhaus: The Health of Nations; NBER, 2002, W8818.

19. A Question to Ponder • Would you rather have 2005 health levels and 1955 incomes or 1955 health levels and 2005 incomes? • No formal survey, but Nordhaus’ informal survey suggest many opt for the former, consistent with his finding • Choice of former goes up with age

20. Defects of Current Price Indices • Current medical price indices suggest much of expenditure increase is a price increase • Implies falling productivity in medical care • Sometimes used to justify expenditure caps • But official price indices are badly biased upward for many reasons, including the omission of health gains Price index bias: Berndt et al., Handbook of Health Econ; Newhouse, NBER W8168, Academia Ec Rev March 2001.

21. Toward Better Price Indices • Need to construct price indices from Δcost of episode and Δoutcomes • Price indices based on medical inputs such as MD visit cannot account for Δquality of care • For example, better scanner looks like Δprice • Heart attack work suggests falling price of heart attack treatment; need to carry out similar work for other conditions Heart attack price: Cutler et al., QJE, November 1998.

22. Conclusions • Useful expansion of National Health Accounts to measure time used in the production of health • Comparative measures across countries at a point in time and within countries across time can yield useful inferences • Need to base price indices on episodes, not prices of medical care inputs