Toward a Satellite Account for Health

1. Toward a Satellite Account for Health Ana Aizcorbe BEA Advisory Committee Meeting May 4th, 2007

2. The rapid growth in health care expenditures has raised difficult questions. • How do health expenditures translate into improvements in health? • What are the costs and benefits of treatments to society as a whole? Source: Bureau of Economic Analysis

3. The type of information needed to address these questions is not readily available. • For example, • Nominal expenditures broken down by disease to assess the benefit of treatment • Price measures that accurately reflect increases in the quality of treatments

4. BEA plans to develop a Health Satellite Account to respond to these needs. The satellite account will provide: • A reconciliation of health care spending estimates from the Centers for Medicare and Medicaid Services (CMS) and those from the Bureau of Economic Analysis, • Data on nominal expenditures by disease that are consistent with CMS’s National Health Expenditures Accounts, • Improved price deflators, and • Measures for the indirect costs of illness, such as mortality costs and morbidity costs due to absenteeism.

5. Price indexes: Increasing prices are an important driver of cost increases • PCE for medical care grew 9 % per year from 1980-2005. • Over ½ of that growth represents increases in prices, as measured in standard price indexes.

6. But existing price indexes have well-known problems. Sensitive to underlying assumptions: • BLS’ Medical Care Price Index (MCPI) focuses on consumer payments • BEA price index relies on indexes from the BLS PPI program Both have problems accounting for • quality improvements, and • reduced cost of treatment

7. BEA’s satellite account will include a disease-based price index. • Disease-based price indexes will better account for reductions in cost that arise from the substitution across treatment classes. • These episode-based indexes will be used to construct indexes for expenditures by product class and by industry, as currently reported in the accounts. • The index will not address the problem of accounting for improvements in treatments. • Difficult problem where there is no consensus on the solution.

8. Preliminary work on price indexes suggests the issue may be numerically important. Comparison of Price Indexes for Medical Care, 2001-2003 (compound annual growth rates) Provider-Based Disease-Based Source: A. Aizcorbe and N. Nestoriak, “Using Commercially-Defined Episodes of Illness for the Measurement of Health Accounts: A Progress Report,” Paper presented at NBER/CRIW Summer Institute, July 2006

9. Progress and Plans Two-year effort to study data sources and methods • Completed preliminary draft of study on disease-based price indexes. Continued interaction with members of the academic and statistical communities • Participating in National Academies Panel on Health Accounts • Working closely with David Cutler and Allison Rosen’s Health Accounts Group • Maintaining contact with colleagues at CMS, BLS, and other statistical agencies. Plan is to develop a detailed proposal for a BEA Health Satellite Account by the end of 2009.