Medical Care Output and Productivity
edited by David M. Cutler and Ernst R. Berndt
University of Chicago Press, 2001
Cloth: 978-0-226-13226-6 | Electronic: 978-0-226-13230-3
DOI: 10.7208/chicago/9780226132303.001.0001


With the United States and other developed nations spending as much as 14 percent of their GDP on medical care, economists and policy analysts are asking what these countries are getting in return. Yet it remains frustrating and difficult to measure the productivity of the medical care service industries.

This volume takes aim at that problem, while taking stock of where we are in our attempts to solve it. Much of this analysis focuses on the capacity to measure the value of technological change and other health care innovations. A key finding suggests that growth in health care spending has coincided with an increase in products and services that together reduce mortality rates and promote additional health gains. Concerns over the apparent increase in unit prices of medical care may thus understate positive impacts on consumer welfare. When appropriately adjusted for such quality improvements, health care prices may actually have fallen. Provocative and compelling, this volume not only clarifies one of the more nebulous issues in health care analysis, but in so doing addresses an area of pressing public policy concern.


David M. Cutler is a professor of economics at Harvard University, a research associate of the National Bureau of Economic Research, and the editor of The Changing Hospital Industry, published by the University of Chicago Press.

Ernst R. Berndt is a professor of applied economics at MIT's Sloan School of Management, director of the NBER's Program on Technological Progress and Productivity Measurement, and coeditor of Fifty Years of Economic Measurement, published by the University of Chicago Press.


Prefatory Note

- David M. Cutler, Ernst R. Berndt
DOI: 10.7208/chicago/9780226132303.003.0001
[medical care, productivity, United States, prices, output, price indexes, medical technologies, patient compliance, biomedical research, hospital care]
Measuring the output of the medical sector has been a long-standing policy concern. With the United States and other developed countries spending so much on medical care (7–14 percent of GDP), health care analysts invariably ask what one obtains for all these expenditures. Answering this question requires measuring the output of the medical care sector. The chapters in this volume make a substantial contribution to the measurement of medical care prices, output, and productivity. The book examines the theoretical foundations underlying measures of medical care outcomes, the conceptual and measurement issues that underlie construction of medical care price indexes in the United States, implications of changes introduced into the January 1998 major revision of the Consumer Price Index, the impact of changing medical technologies on reducing the burden of cataracts, health care output and prices in the Producer Price Index, hospital care and physician services, arthritis drugs, treatment price indexes for acute phase major depression, patient welfare and patient compliance, and the allocation of publicly funded biomedical research. (pages 1 - 12)
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I. Conceptual Issues in Medical Care Prices and Productivity

- Jack E. Triplett
DOI: 10.7208/chicago/9780226132303.003.0002
[health care, price index, car repair, national economic accounts, national health accounts, mental health, output measures, health expenditures, measurement]
This chapter examines the question: Why is health care different from any other analogous service, such as car repair? Comparing measurement issues in human repair and car repair is instructive. There is something to be learned from the way we measure the output of car repair that can be applied to the measurement of human repair and can simplify the health care measurement problem. Because output measures in the national accounts of most countries are typically produced through deflation — that is, by dividing health expenditures by a price index — medical care price index methodology has determined the concepts embodied in medical care output measures (except of course in national accounts for countries in which medical care is part of the public sector). This chapter first describes an approach, dubbed the “human repair model,” and contrasts it with approaches used in other parts of national economic accounts and national health accounts. The model is implemented on mental health care expenditures. (pages 15 - 94)
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- David Meltzer
DOI: 10.7208/chicago/9780226132303.003.0003
[cost-effectiveness analysis, quality-adjusted life years, welfare economics, patient preferences, benefits, costs, medical interventions, health care]
Increasingly, both private and public health care institutions in the United States are looking toward medical cost-effectiveness analysis as they consider complex resource allocation decisions concerning medical technologies. This chapter investigates the connection between the methods used in the most common form of medical cost-effectiveness analysis — that which utilizes quality-adjusted life years (QALYs) — and principles of welfare economics. It addresses two key issues concerning the link between welfare economics and cost-effectiveness analysis: the measurement of benefits and the measurement of costs, especially future costs, of medical interventions. After reviewing the historical origins and development of cost-effectiveness analysis based on QALYs, the chapter explores the use of revealed preference measures to assess the extent to which QALYs reflect patient preferences. (pages 97 - 113)
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- Tomas Philipson, Darius Lakdawalla
DOI: 10.7208/chicago/9780226132303.003.0004
[nonprofit sector, for-profit sector, productivity, long-term care, United States, mixed industries, property rights, health care, research and development, incentives]
Health care differs from many other industries in that most production takes place in the nonprofit sector. Little is known about the economic forces which determine productivity in the nonprofit sector, especially compared to that which is known about the for-profit sector. There, productivity analysis is well developed, especially through recent work stressing the endogenous determination of technical change. This chapter analyzes the incentives which generate productivity differences between nonprofit and for-profit firms, focusing on some empirical differences between nonprofits and for-profits in mixed industries. It predicts that, when both types coexist, nonprofits are larger and less efficient, but nevertheless become more numerous than for-profit firms under competitive conditions. In other words, nonprofits drive out for-profit firms through competition, although they exhibit higher marginal and average costs. Another prediction is that, contrary to property rights theory, nonprofits invest more in cost-reducing research and development than for-profits, holding other factors, such as third-party insurance contracts, constant. The chapter also discusses some broad patterns in the productivity differences between nonprofits and for-profits in the long-term care industry in the United States. (pages 119 - 137)
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- Ernst R. Berndt, David M. Cutler, Richard G. Frank, Zvi Griliches, Joseph P. Newhouse, Jack E. Triplett
DOI: 10.7208/chicago/9780226132303.003.0005
[price indexes, medical care, health expenditures, United States, Consumer Price Index, Producer Price Index, Bureau of Labor Statistics, output, prices]
The measurement of the output of the medical care system is necessary to assess the productivity levels and growth of a country's economy and medical care system. Medical price indexes have uses other than those involving output and productivity measurement. In the United States, both within the health sector and more generally, contracts occasionally contain provisions that depend on growth of the medical Consumer Price Index (CPI). The CPI and the Producer Price Index (PPI) are also employed in updating fee schedules for certain administered pricing schemes and payments to some health plans. This chapter reviews the measurement issues underlying the construction of medical care price indexes. It describes procedures employed by the U.S. Bureau of Labor Statistics in the construction of its medical CPIs and PPIs (including recent revisions and changes). It also discusses alternative notions of medical care output that involve the price of a treatment episode rather than the prices of fixed bundles of inputs. Finally, the chapter outlines salient features of a new price index for health expenditures. (pages 141 - 198)
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II. Current State of Measurement

- Ina Kay Ford, Daniel H. Ginsburg
DOI: 10.7208/chicago/9780226132303.003.0006
[medical care, Consumer Price Index, personal consumption expenditure, Point of Purchase Survey, prescription drugs, health insurance, health expenditures, measurement]
The medical care component of the Consumer Price Index (CPI) is evolving into a more comprehensive measure of household medical expense price movement in the economy. The personal consumption expenditure is the part of gross domestic product that approximately corresponds to the CPI. The sample of retail outlets for most CPI basic indexes is drawn from the Point of Purchase Survey (POPS), conducted by the Census Bureau for the Bureau of Labor Statistics (BLS). As of publication of the January 1995 CPI, BLS changed the way the CPI treats prescription drugs that lose patent protection. The CPI has not been able to develop a feasible method to directly price health insurance. This chapter discusses the CPI's use of health expenditures, measurement approaches, and other methodological issues to obtain weights and prices. It looks at the organization of the CPI medical care major group as of January 1998, when a revised CPI was introduced. (pages 203 - 219)
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- Dennis Fixler, Mitchell Ginsburg
DOI: 10.7208/chicago/9780226132303.003.0007
[Producer Price Index, health care, hospitals, physicians, drugs, price indexes, medical laboratories, nursing homes, home health care]
Within the context of the Producer Price Index (PPI), the health care sector is viewed as containing the following service and manufacturing industries: hospital and related services, physicians, medical laboratories, nursing homes, drugs, and home health care. The industrial classification of the relevant industries will change shortly with the implementation of the North American Industrial Classification System (NAICS) agreed to in 1996. This system will allow the U.S. product codes to be mapped into a system that is similar to the ones used in other countries. To economize on the explanation of index number construction and the associated problems, this chapter focuses on the PPI indexes for hospitals, physicians, and drugs. It also briefly describes the price indexes for medical labs, nursing homes, and home health care. (pages 221 - 270)
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- Arthur Sensenig, Ernest Wilcox
DOI: 10.7208/chicago/9780226132303.003.0008
[National Health Accounts, National Income and Product Accounts, hospital care, physician services, Health Care Financing Administration, Bureau of Economic Analysis, health care, United States]
The Health Care Financing Administration (HCFA), an agency of the Department of Health and Human Services, in its National Health Accounts (NHA), and the Bureau of Economic Analysis (BEA), an agency of the Department of Commerce, in its National Income and Product Accounts (NIPA), each publish national data on expenditures for health care. The NHA show the interaction between health care services and funding sources and how these relationships change over time, while the NIPA provide an up-to-date, overall view of domestic and national production, its distribution, and its use as shown by the interrelated receipts and expenditures of producers, consumers, investors, government, and the foreign suppliers and customers of the United States. In an effort to improve the consistency of these two sets of estimates, HCFA and BEA are engaged in a joint program to reconcile the health care estimates in the NHA and in the NIPA. This chapter focuses on the reconciliation of hospital care and physician services. (pages 271 - 300)
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III. Recent Developments

- David M. Cutler, Mark McClellan, Joseph P. Newhouse, Dahlia Remler
DOI: 10.7208/chicago/9780226132303.003.0009
[price indexes, medical care, heart attacks, acute myocardial infarction, medical treatments, service price index, cost-of-living index, quality of life, inflation rates, benefit payments]
This chapter examines price indexes for medical care, focusing on heart attacks (acute myocardial infarction). It first describes several conceptual issues related to medical care price indexes and considers some basic descriptive information on changes in the treatment of heart attacks over time. It then treats formally two types of medical care price indexes, a service price index and a cost-of-living index. A key practical problem in estimating both types of indexes is measurement: list prices (“charges”) and harder-to-measure transaction prices have diverged increasingly, the development of new or modified medical treatments complicates the comparison of “like” goods over time, and determining the effects of medical treatment on important health outcomes is confounded by many intervening factors. The chapter summarizes the results for heart attack price indexes and extends them to include quality of life and more recent time periods. It also discusses inflation rates and benefit payments. (pages 305 - 347)
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- Paul Heidenreich, Mark McClellan
DOI: 10.7208/chicago/9780226132303.003.0010
[mortality, acute myocardial infarction, medical treatments, cost-effectiveness, health care, disease incidence, heart attacks]
Age-adjusted mortality rates for ischemic heart disease have fallen for the last thirty years. The reasons for the decline — which include primary prevention of coronary events, secondary prevention, improved outcomes of the events themselves, and changes in event severity — have been the subject of considerable debate. Much of the debate centers on the relative importance of medical technology versus lifestyle changes or other sources of reductions in risk factors. The debate has important implications for priorities in health care research and policymaking: if medical interventions have been relatively unimportant, then the direction of more resources to research and education on preventive care may be worthwhile. Using evidence from the clinical literature and a range of empirical databases, this chapter looks at the impact of particular changes in medical treatment in acute myocardial infarction (AMI) or heart attacks over the last two decades. It first discusses trends in disease incidence, medical treatments, and thirty-day mortality before estimating the overall cost-effectiveness of all AMI treatments combined. (pages 363 - 410)
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- Irving Shapiro, Matthew D. Shapiro, David W. Wilcox
DOI: 10.7208/chicago/9780226132303.003.0011
[cataract surgery, health expenditures, prices, decision making, health care, medical treatments, monetary costs]
Health expenditure on life-extending medical treatments can not only increase current-period utility, but have durable effects on utility. By making the number of periods of life endogenous, health expenditures can cause interesting, and even perverse, implications for cost-of-living measurement. This chapter argues that economic decision making by patients is important for understanding the demand for certain medical procedures by presenting a case study of cataract surgery. It first outlines developments in the techniques of cataract surgery since mid-century. It then discusses how these improvements in technique have reduced the degree of visual impairment of patients receiving cataract surgery, thereby dramatically increasing the rate of surgery. It also considers how the benefits of surgery should be valued across time given the changing visual function at time of surgery. Furthermore, it discusses the resource and monetary costs of cataract surgery and makes recommendations for measuring prices in the health care sector based on the findings about cataract surgery. (pages 411 - 438)
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- Iain M. Cockburn, Aslam H. Anis
DOI: 10.7208/chicago/9780226132303.003.0012
[rheumatoid arthritis, nonsteroidal antiinflammatory drugs, antirheumatic drugs, efficacy, toxicity, demand, advertising, clinical trials, hedonics]
Rheumatoid arthritis (RA) is a painful, debilitating, and progressive disease which affects millions of people worldwide. Two principal classes of drugs are used to treat RA: nonsteroidal antiinflammatory drugs and disease-modifying antirheumatic drugs. This chapter examines the market for a group of drugs used to treat RA during the period 1980–1992. Unlike some previous work on the hedonics of pharmaceutical products, it pays little attention to differences in the dosage regimen. The chapter begins with a brief review of the nature of RA and its treatment. It then discusses issues related to the measurement of the relative efficacy and toxicity of drug treatments for RA. Next, it presents economic data on the market for a specific set of drugs used in the treatment of severe RA and considers them in the context of models of demand for differentiated products. Finally, the chapter suggests alternative approaches that may provide some additional insight, in particular analysis of the role of advertising and promotional expenditures. Primary measures of efficacy and toxicity are computed from the reported results of published clinical trials. (pages 439 - 458)
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- Ernst R. Berndt, Susan H. Busch, Richard G. Frank
DOI: 10.7208/chicago/9780226132303.003.0013
[price indexes, acute phase major depression, Consumer Price Index, Producer Price Index, medical care, alternative treatments, prices, quantities, health expenditures]
Much has been written in the last decade on broad trends in medical care spending in the United States. Although the most recent evidence is somewhat ambiguous, the apparent slowdown in the rate of increase in aggregate health expenditures over the last five years has been welcomed by many governments, employers, patients, and insurers. This chapter reports on the first three years of a research program aimed at measuring prices and output for the treatment of acute phase major depression. The approach taken in this program of research builds on several recent efforts to construct price indexes for medical care. The chapter begins with an overview of current U.S. Bureau of Labor Statistics procedures for constructing medical care price indexes, and then provides a background on the nature of and alternative treatments for acute phase major depression. It also considers quantities and prices of the treatment bundles from 1991 to 1995, describes aggregate price indexes similar to the Consumer Price Index and the Producer Price Index, and comments on an initial analysis involving hedonic price procedures. (pages 463 - 505)
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IV. Extensions of the Frontier

- Sherry Glied
DOI: 10.7208/chicago/9780226132303.003.0014
[child mortality, United States, child safety, unintentional injury, children, accidents, regulation, technology, family, post-accident care]
One of the bright spots in the changing circumstances of American children over the past three decades has been the significant decline in child mortality. The mortality rate among children ages one through four fell 57 percent between 1960 and 1990, and the rate for children ages 5–14 fell 48 percent over those thirty years. In percentage terms, these declines are steeper than those experienced by any other age group. Despite these large declines in mortality, unintentional injury remains the leading cause of death among children ages 1–14, and most of these deaths are, in some sense, avoidable. Improvements in childhood mortality may be a consequence of reductions in the rate of accidents or improvements in accident outcomes. This chapter examines the determinants and assesses the value of the decline in childhood unintentional injury mortality in the United States. It also discusses the relationship between regulation, technology, and post-accident care and family resources, as well as changes in the production of child safety. (pages 511 - 534)
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- Paul Ellickson, Scott Stern, Manuel Trajtenberg
DOI: 10.7208/chicago/9780226132303.003.0015
[pharmaceutical industry, patient welfare, patient compliance, decision making, pharmaceutical innovation, physicians, patients, prescriptions, discrete choice model]
The pharmaceutical industry's innovative output consists primarily of a small number of new drugs, each of which is required to receive approval from the U.S. Food and Drug Administration. This chapter uses an empirical framework to evaluate patient welfare based on patient compliance. Extending previous studies of the welfare benefits from innovation, it unpacks the separate choices made by physicians and patients in pharmaceutical decision making and develops an estimable econometric model which reflects these choices. The proposed estimator for patient welfare depends on whether patients comply with the prescriptions they receive from physicians and the motives of physicians in their prescription behavior. By focusing on compliance behavior, the proposed welfare measure reflects a specific economic choice made by patients. Relying on recent advances in the study of differentiated product markets, a discrete choice model is developed that lends itself naturally to the evaluation of welfare gains from pharmaceutical innovation. (pages 539 - 560)
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- Frank R. Lichtenberg
DOI: 10.7208/chicago/9780226132303.003.0016
[biomedical research, funding, budget allocation, National Institutes of Health, United States, diseases, research and development, mortality]
In the last century, the average health of the American people has improved dramatically. The mean life expectancy of Americans has increased almost twenty years, or two years per decade, since the turn of the century. Just from 1979 to 1988, the age-adjusted mortality rate declined 7.2 percent. An important part of this enormous progress in health is probably due to large private and public investments in biomedical research. In 1993, research and development (R&D) in the health care sector accounted for 18 percent of total R&D expenditure in the United States. The National Institutes of Health (NIH) administer about 80 percent of federal health R&D and places a high priority on funding basic research. This chapter describes a simple theoretical model of the allocation of the applied component of public biomedical research expenditure — the approximately 50 percent of expenditure that is of direct, near-term relevance to specific diseases — and presents some empirical evidence about the determinants of this budget allocation. (pages 565 - 590)
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Author Index

Subject Index