1.1 Using Appropriate Price Indices for Expenditure Comparisons

Objectives: To ensure consistency and to avoid confusion about the use of price indices with MEPS expenditure data. Table 1.1.1 contains a summary of the recommended applications of different indexes described below.

Comparing Total Expenditures Across Different Years - Most often, comparisons are made of aggregate expenditures of one type or another. To take a familiar example, total expenditures for the U.S. civilian non-institutionalized population were $553 billion in 1997 and $811 billion in 2002 (both in nominal terms). This may be done on a per capita basis, for certain subpopulations, or for certain types of services or drugs (for example, antidepressants), but it amounts to the same thing.

• Option 1: Make comparisons in nominal (or unadjusted) dollars. That is, leave expenditure estimates as they are, but document this clearly.
• Option 2 (preferred): Use GDP price index to put in constant dollars (also known as real or inflation adjusted dollars). See Attachment 2 (National Income and Product Accounts, Bureau of Economic Analysis, Department of Commerce). For example, to express the 1997 total expenditure estimate in 2002 real (inflation adjusted) dollars, an analyst should multiply the 1997 estimate of $553 billion by a factor of (104.493/95.415) (obtained from Table 1.1.2).

Explanation: In making these comparisons, what we are really asking is how has the amount of society’s resources devoted to health care changed over time.  One option is to simply make expenditure comparisons in nominal terms but this does not account for price inflation—a dollar today is not worth a dollar tomorrow. A general price index should be used to put dollar figures into constant terms, because it provides an overall sense of what a dollar (or a few trillion of them) can buy today vs. yesterday, be it health care or something else.

While the Consumer Price Index (CPI) is the better known general index, the GDP implicit price index should be used. The GDP price index has a number of advantages over the composite CPI. Most notably, the composite CPI covers only about 60 percent of the economy, omitting rural consumers, government purchases, and investment goods. Given the high proportion of health care expenditures that comes from federal, state, and local governments, it is especially important to use a price index, such as the GDP index, that is broadly reflective of the entire U.S. economy. The GDP price index is also used by CMS in the National Health Expenditure Accounts.

Comparing Out-of-Pocket Expenditures Across Different Years - In some cases, we just want to compare out-of-pocket expenditures over time.

• Guideline: Use the Consumer Price Index or CPI (all-item all urban consumers). See Table 1.1.2.

Explanation: The CPI is the standard price index for consumer spending because it does not include government purchases and investment goods.

Pooling Two or More Years of MEPS Expenditures For Average Annual Estimates - Occasionally, sample size limitations make it necessary to pool two or more years of MEPS expenditure data to produce expenditure estimates of acceptable precision (for example, in the case of infrequently occurring health conditions or particular subpopulations).

• Guideline 1 (total): If pooling total expenditures, use the Personal Health Care Expenditure (PHCE) Price Index, CMS Office of the Actuary.
• Guideline 2 (service type): If pooling only one type of health care expenditure, for example prescription drugs, then use the price index for that component.

Explanation: Pooling expenditures requires a price index that is specific to health care services. Essentially, we are trying to mimic an annual expenditure estimate rather than compare inflation adjusted resources used for health care over time. But health care prices change from year to year, and faster than overall price inflation, so we need to account for these health care price changes when pooling.

The PHCE is recommended over two alternatives, the CPI component specific to medical care (CPI-M) and the GDP price index for medical care. The PHCE reflects total personal health care expenses, which is more appropriate than the CPI-M which only reflects out of pocket expenses. The PHCE is preferable to the GDP because the GDP includes some expenses extraneous to MEPS such as those for medical research and public health programs. The CMS Office of the Actuary constructs the PHCE based on the components of the CPI-M and Producer Price Index (PPI).

Table 1.1.1. Crosswalk of Price Indices and MEPS Analyses

¹ GDP Price Index, National Income and Product Accounts, Bureau of Economic Analysis (http://www.bea.gov/national/nipaweb/index.asp)

² CPI Index (All Urban Consumers, All Items) Bureau of Labor Statistics (http://data.bls.gov/cgi-bin/surveymost?cu)

³ PHCE Price Index, National Health Expenditure Accounts, CMS Office of the Actuary

Table 1.1.2 Price Index Series (last updated March 2009)

¹ GDP Price Index, National Income and Product Accounts, Bureau of Economic Analysis (http://www.bea.gov/national/nipaweb/index.asp)

² CPI Index (All Urban Consumers, All Items) Bureau of Labor Statistics (http://data.bls.gov/cgi-bin/surveymost?cu)

³ PHCE Price Index, National Health Expenditure Accounts, CMS Office of the Actuary

Figure 1: Price proxies for the personal health care expenditure price index

¹ Producer Price Index for hospitals, U.S. Department of Labor, Bureau of Labor Statistics. Used beginning 1994 and scaled to 100.0 in 2000. Indexes for 1960-93 are based on a CMS developed output or transaction price index.

² Consumer Price Index for all urban consumers, U.S. Department of Labor, Bureau of Labor Statistics. Indexes are scaled so that the 2000 value is 100.0.

³ With the NHE04 benchmark, the CPI for professional services was replaced with the CPI for other medical professionals, beginning in 1988.

⁴ NNHIPI developed and maintained by CMS.

SOURCE: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group.

Source: National Health Expenditures Accounts: Definitions, Sources, and Methods Used in the NHEA 2004, CMS Office of the Actuary (http://www.cms.hhs.gov/NationalHealthExpendData/02_NationalHealthAccountsHistorical.asp)