Commonly observed shifts in the utilization of medical care services to treat diseases may pose problems for official price indexes at the Bureau of Labor Statistics (BLS) that do not account for service shifts. We examine how these shifts may lead to different price estimates than those observed in official price statistics at the BLS.
We use a convenience sample of enrollees with employer‐provided insurance from the MarketScan database for the years 2003 to 2007. Population weights that consider the age, sex, and geographic distribution of enrollees are assigned to construct representative estimates.
We compare two types of price indexes: (1) a Service Price Index (SPI) that is similar to the BLS index, which holds services fixed and measures the prices of the underlying treatments; (2) a Medical Care Expenditure Index (MCE) that measures the cost of treating diseases and allows for utilization shifts.
Over the entire period of study the CAGR of the SPI grows 0.7 percentage points faster than the preferred MCE index.
Our findings suggest that the health component of inflation may be overstated by 0.7 percentage points per year, and real GDP growth may be understated by a similar amount. However, more work may be necessary to precisely replicate the indexes of the BLS to obtain a more accurate measure of these price differences.