Measuring and Modeling Health Care Costs

by Ana Aizcorbe (Editor), Colin Baker (Editor), Ernst R. Berndt (Editor), David M. Cutler (Editor)

Overview

Health care costs represent a nearly 18% of U.S. gross domestic product and 20% of government spending. While there is detailed information on where these health care dollars are spent, there is much less evidence on how this spending affects health. 
           
The research in Measuring and Modeling Health Care Costs seeks to connect our knowledge of expenditures with what we are able to measure of results, probing questions of methodology, changes in the pharmaceutical industry, and the shifting landscape of physician practice. The research in this volume investigates, for example, obesity’s effect on health care spending, the effect of generic pharmaceutical releases on the market, and the disparity between disease-based and population-based spending measures. This vast and varied volume applies a range of economic tools to the analysis of health care and health outcomes.

Practical and descriptive, this new volume in the Studies in Income and Wealth series is full of insights relevant to health policy students and specialists alike.

Product Details

ISBN-13:	9780226530994
Publisher:	University of Chicago Press
Publication date:	03/05/2018
Series:	National Bureau of Economic Research Studies in Income and Wealth , #76
Sold by:	Barnes & Noble
Format:	eBook
Pages:	512
File size:	31 MB
Note:	This product may take a few minutes to download.

About the Author

Ana Aizcorbe is a senior research economist at the Bureau of Economic Analysis. Colin Baker is social science analyst at the U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation. Ernst Berndt is the Louis E. Seley Professor in Applied Economics at the MIT Sloan School of Management, and a research associate of the National Bureau of Economic Research. David M. Cutler is the Otto Eckstein Professor of Applied Economics and Harvard College Professor at Harvard University, and a research associate of the National Bureau of Economic Research.

Read an Excerpt

CHAPTER 1

Measuring Health Services in the National Accounts An International Perspective Paul Schreyer and Matilde Mas

1.1 Introduction

In 2011, domestic demand for health services accounted for an average of 11 percent of gross domestic product (GDP) in Organisation for Economic Co-operation and Development (OECD) countries, as an item of household demand second only to housing. At the same time, variations between countries are significant, ranging from a modest 4 percent in Luxembourg to a sizable 15 percent in the United States. Such differences within a fairly homogeneous set of countries immediately raise a number of questions: Are we comparing like with like? And if so, are differences in the value of health services due to differences in prices or to differences in the volume of health services provided? A similar question arises when comparing the evolution of health expenditure within a country over time: How much of an increase in expenditure has occurred because of more services delivered and how much has occurred because of services having become more expensive? This chapter aims at exploring the issue of measuring health services and the breakdown of expenditures between prices and volumes from an international perspective. It will ask whether health services are defined in the same way across countries and whether statistical offices apply similar methods to undertake a price-volume split when nominal expenditures are tracked over time. The chapter will also present new intercountry comparisons of the volume of health services consumed, based on an approach recently put in place by the OECD and Eurostat.

Figure 1.1 is more complex to construct than meets the eye. Indeed, its construction reflects a number of measurement issues that are specific to health services. The first specificity is that unlike, say, a haircut, health services are not necessarily the object of transactions between two parties. Most countries' health systems operate under a private or public insurance system and the price for the service is often negotiated between the insurer and the health care provider rather than between the patient and the health care provider. Payments or reimbursements by health insurers are counted as consumer expenditures in the national accounts, and so require an imputation. A second specificity is that government may provide health services directly to individuals with only a nominal fee or no fee involved at all. Such social transfers in kind do not figure among consumer expenditures. International comparisons of health expenditures are thus best based on a measure of individual health services that sums up expenditures by patients and the value of the in-kind services provided by government. Such in-kind services need to be identified and valued. Figure 1.1 reflects such a valuation and shows total health expenditures whether incurred by patients (or their insurance companies) or whether provided by government. The third specificity is that health-care-providing units are more often nonmarket producers than in other industries. This distinction entails a different accounting treatment, at least in the way the value of health services at current prices is measured: whereas the value of sales constitutes output for market producers, the value of output for nonmarket producers is measured as the sum of production costs. The distinction between market and nonmarket producers is also important from the perspective of assessing efficiency in the provision of health services: market and nonmarket producers may take their decision on the quantities (and prices charged) following different objective functions. Differences in health care productivity performance may be associated with the share of nonmarket versus market producers and provide useful insights from international comparisons. Finally, the measurement of the volume of health services (as opposed to health expenditure) is tricky: rapid progress in medical technology and complex services bring out many of the measurement challenges that statisticians face when developing price indices and volume measures in the national accounts.

The discussion about the measurement of health and education services is by no means new. Nearly forty years ago, Peter Hill (1975) developed a set of principles and guidance for measuring health, education, and collective government services. More recently, the debate has resurfaced. Eurostat (2001) stated the desirability of applying output-based measures to nonmarket services. In the United Kingdom, the topic was taken up by the widely discussed Atkinson Review (Atkinson 2005). The measurement of services output and productivity has also been a longstanding topic of interest in the United States, with a series of publications including Triplett (2001), Cutler and Berndt (2001), Triplett and Bosworth (2004), Abraham and Mackie (2006), and National Research Council (2010). Health services in particular have been the subject of research on cost-effectiveness and productivity (Cutler, Rosen, and Vijan 2006; Rosen and Cutler 2007). Much data development is also ongoing with the construction of health accounts for the United States, so as to be better able to track the flow of health-related funds through the economy. A recent overview of concepts and quality adjustments of measures of health and education services can be found in Schreyer (2010, 2012).

This chapter will only provide partial answers to these issues. Its aim is to provide an international perspective on the measurement of health care in the national accounts. Section 1.2 takes a look at the international accounting conventions for health services, as spelled out in the 2008 System of National Accounts (SNA 2008). Section 1.3 reviews relevant national accounts practices in a broad selection of OECD countries. Section 1.4 turns from intertemporal to interspatial comparisons and reports on recent efforts by the OECD to construct internationally comparable measures of the price levels and volumes of health care services. Section 1.5 concludes by summing up the key measurement tasks ahead.

1.2 What the SNA Has to Say about Measuring Health Services

1.2.1 Current Price Measures

The national accountant's task of measuring production begins with identifying the units that produce health services and distinguishing between market and nonmarket producers. Market producers sell their output at prices that are economically significant. Thus, for market health services, the value of output in current prices can be measured by the value of sales of these services. However, health provision is among the most common examples of services provided by government free of charge or at prices that are not economically significant and thus constitute nonmarket output. A price that is not economically significant is deliberately fixed well below the equilibrium price that would clear the market. The SNA defines it as a price that has little or no influence over how much the producer is willing to supply and that has only a marginal influence on the quantities demanded.

There are differences in country practices to identify the economic significance of prices. For instance, the European System of Accounts (ESA 1995) considers, for practical reasons, that a price is not economically significant if it covers less than half of the costs of producing the service. Neither the 2008 SNA nor its predecessor, the 1993 SNA have specified a particular level of cost coverage that complicates international comparisons of market and nonmarket provision. Whatever the exact rule, valuation of output is based on adding the costs incurred in production; namely, the sum of:

• intermediate consumption (the goods and services used up in producing the service);

• compensation of employees (costs of doctors, nurses, etc.);

• consumption of fixed capital (depreciation of hospital buildings, of medical equipment etc.); and

• other taxes, less subsidies, on production.

Note that, according to the 2008 SNA, capital costs for nonmarket producers are solely measured as the value of depreciation, thus ignoring that part of costs of capital services that reflect the opportunity costs of capital and revaluation. The main reason for this convention lies in the fact that any such imputation directly affects GDP and national income and that there is a broad spectrum of possible imputations. That said, Jorgenson and Landefeld (2006), Jorgenson and Yun (2001), and OECD (2009) show alternatives for dealing with this complication. From the perspective of productivity measurement, the asymmetric treatment of assets used in market and in nonmarket production results in an incomplete estimate of capital inputs and in an asymmetric treatment of the same asset, depending on the sector affiliation of the asset owner (Jorgenson and Schreyer 2013). For analytical applications it may therefore be considered useful to deviate from the national accounts convention. An example for such an application is Mas, Pérez, and Uriel (2006), who examine the contribution of infrastructure capital, largely held by government entities, to economic growth in Spain and who apply a complete user cost expression to public capital. We conclude that a breakdown between market and nonmarket production in the publication of national accounts data would be of significant interest to analysts.

A further complication arises in health provision measurement due to the existence of insurance schemes of different scopes and variations. Unlike other services that are directly transacted between the supplier and the consumer, health service transactions often occur between three parties: the health service supplier, the consumer, and the public or private insurance schemes. The consequence is that transacted payments between the supplier and the consumer are not necessarily indicative of the price of the health service. Institutions vary greatly between countries, as shown in figure 1.2. Any international comparison of health care expenditures, say, in proportion to GDP, needs therefore to be based on measures reflecting full costs in health care provision, whether they accrue to patients, private providers, or government. This is indeed the approach pursued by the OECD-Eurostat Programme on Purchasing Power Parities (Koechlin, Lorenzoni, and Schreyer 2010), where the value of actual individual consumption of health care is deflated with international price indices to arrive at volume comparisons of per capita consumption of health services between countries.

1.2.2 Volumes

Market and Nonmarket Producers

The current value of health services, if provided by nonmarket producers, is always valued at cost in the national accounts. Thus, the value of inputs equals the value of outputs. At the same time, this does not mean that the volume of outputs cannot be distinguished from the inputs used to produce it. Changes in productivity may occur in all fields of production, including the production of nonmarket services. Volume measurement is thus inherently different from the measurement of values, also in the case of nonmarket producers. However, volume measurement of the services provided by nonmarket producers is not inherently different from volume measurement of the services provided by market producers. This was first pointed out by Hill (1975, 19):

It is proposed as a matter of principle that the basic methodology used to measure changes in the volume of real output should always be the same irrespective of whether a service is provided on a market or on a non-market basis. This is not to say that the actual numerical measures would not be affected by whether the service is market or non-market, because different weighting systems would be involved, but at least the methods of measurement should be conceptually similar.

Schreyer (2010) confirms this principle, but points out that in practice there has been a tendency to create separate volume indices for market and nonmarket production. Traditionally, volume output measures for nonmarket producers have been based on volume measures of inputs with the implication of assuming zero productivity change and the risk of inadequately capturing changes in living standards and macroeconomic productivity. A number of possibilities exist for deriving output-based volume measures of health services.

In a market-based health system where there is information on market prices, expenditure on the treatment of a disease can be deflated by a disease-specific price index to arrive at a volume output measure of the disease. For example, Berndt et al. (2000) have estimated a price index for heart attacks and this index can be used to deflate disease-specific expenditures. This is similar to what happens in other market sectors in the economy where volume output measurement is accomplished by dividing data on revenues or sales by a price index.

In some countries, hospitals and other providers of medical services are considered market producers because they receive economically significant revenues from reimbursement schemes that, on average, cover their costs. In such cases, a "quasi-price" index consists of average revenues per treatment. One notes, however, that reimbursement schemes are themselves based on cost so that the differentiation between costs and revenues is blurred. Also, the fact that there are revenues does not imply that there is a competitive market where prices necessarily carry signals about consumer preferences.

In some instances, it may also be possible to draw on market price information for purposes of deflating values of nonmarket production. A potential candidate is the medical services part of the Consumer Price Index. However, care has to be exerted to make sure that the CPI is representative for the deflation of the nonmarket production. In particular, (a) the services supplied by the market provider have to be sufficiently similar to those supplied by the nonmarket provider, and (b) the scope of the CPI has to match the scope of nonmarket production. This may not be the case when the CPI is designed to reflect prices for out-of-pocket expenditures and when consumers only pay part of the full price for the medical good or service. In this case, the CPI is not an appropriate tool for deflation of nonmarket production, which relies on a concept of measuring production at its full cost.

Alternatively, direct volume indices can be constructed. A direct volume index is the weighted average of the volume indices of different types of treatments, where the cost share of each type of treatment constitutes the weight. Berndt et al. (2000, 173) suggest that "real output of medical care could be formed from cost of disease accounts by counting quantities of medical procedures (the number of heart bypass operations, say, or of appendectomies, or of influenza shots), and weighing each procedure by its cost." Although there are some differences between a direct volume index and a volume index derived at by deflation (such as index number formulae, timeliness of data), the basic idea remains the same — volume measures of outputs are sought, as opposed to volume measures of inputs.

Outputs and Outcomes

A key distinction in this context is between inputs, outputs, and outcomes. The 2008 SNA makes this distinction as follows:

Taking health services as an example, input is defined as the labour input of medical and non-medical staff, the drugs, the electricity and other inputs purchased [...] These resources are used in the activity of primary care and in hospital activities, such as a general practitioner making an examination, the carrying out of a heart operation and other activities designed to benefit the individual patient. The benefits to the patient constitute the output associated with these activities. Finally, there is the health outcome, which may depend on a number of factors apart from the output of health care, such as whether or not the person gives up smoking. (SNA 2008, paragraph 15.120)

From a national accounts perspective, the target measure for the production of health services is outputs, not outcomes. This distinction is more difficult than meets the eye, however. First, the SNA reference to output as "benefits to the patient" is best understood as the marginal contribution of health care activities to health outcomes, controlling for all other factors influencing outcomes. This means that the notion of outputs does not exist independently of outcomes. A similar conclusion (Schreyer 2012) arises in the context of quality adjustment (see below). Berndt et al. (1998) distinguish between medical care ("output" in our terminology), the state of health ("outcome" in our terminology), and utility. They envisage a relationship whereby utility depends, among other variables, on the state of health and where the state of health and where the state of health is itself dependent on health care services, on the environment, lifestyle, and so forth. Thus, a health care activity with a higher composite quality than another health care activity could be identified as such if it contributes more to health outcome than the alternative activity.

(Continues…)

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Table of Contents

Prefatory Note
 
 
Introduction
Ana Aizcorbe, Colin Baker, Ernst R. Berndt, and David M. Cutler
 
 
I. Methodological Issues in Measuring Health Care Costs and Outcomes
 
 
1. Measuring Health Services in the National Accounts: An International Perspective
Paul Schreyer and Matilde Mas
Comment: J. Steven Landefeld
 
 
2. A Cautionary Tale in Comparative Effectiveness Research: Pitfalls and Perils of Observational Data Analysis
Armando Franco, Dana Goldman, Adam Leive, and Daniel McFadden
 
 
3. Decomposing Medical Care Expenditure Growth
Abe Dunn, Eli Liebman, and Adam Hale Shapiro
 
 
4. Calculating Disease-Based Medical Care Expenditure Indexes for Medicare Beneficiaries: A Comparison of Method and Data Choices
Anne E. Hall and Tina Highfill
 
 
II. Analyses of Subpopulations and Market Segments
 
 
5. Measuring Output and Productivity in Private Hospitals
Brian Chansky, Corby Garner, and Ronjoy Raichoudhary
 
 
6. Attribution of Health Care Costs to Diseases: Does the Method Matter?
Allison B. Rosen, Ana Aizcorbe, Tina Highfill, Michael E. Chernew, Eli Liebman, Kaushik Ghosh, and David M. Cutler
 
 
7. The Simultaneous Effects of Obesity, Insurance Choice, and Medical Visit Choice on Health Care Costs
Ralph Bradley and Colin Baker
 
III. Prescription Pharmaceutical Markets
 
8. The Regulation of Prescription Drug Competition and Market Responses: Patterns in Prices and Sales following Loss of Exclusivity
Murray L. Aitken, Ernst R. Berndt, Barry Bosworth, Iain M. Cockburn, Richard Frank, Michael Kleinrock, and Bradley T. Shapiro
 
 
9. Specialty Drug Prices and Utilization after Loss of US Patent Exclusivity, 2001–2007
Rena M. Conti and Ernst R. Berndt
 
 
10. Drug Shortages, Pricing, and Regulatory Activity
Christopher Stomberg
 
 
IV. Issues in Industrial Organization and Market Design
 
11. Measuring Physician Practice Competition Using Medicare Data
Laurence C. Baker, M. Kate Bundorf, and Anne Royalty
 
 
12. Risk Adjustment of Health Plan Payments to Correct Inefficient Plan Choice from Adverse Selection
Jacob Glazer, Thomas G. McGuire, and Julie Shi
 
 
13. Going into the Affordable Care Act: Measuring the Size, Structure, and Performance of the Individual and Small Group Markets for Health Insurance
Pinar Karaca-Mandic, Jean M. Abraham, Kosali Simon, and Roger Feldman
 
 
V. Potpourri
 
 
14. The Distribution of Public Spending for Health Care in the United States on the Eve of Health Reform
Didem Bernard, Thomas Selden, and Yuriy Pylypchuk
 
 
15. The Impact of Biomedical Research on US Cancer Mortality: A Bibliometric Analysis
Frank R. Lichtenberg
 
Contributors
Author Index
Subject Index