Medical Care Price Indices: Problems and Opportunities / the Chung-Hua Lectures

Abstract

These Chung-Hua Lectures, given at the Academia Sinica in Taiwan in December 2000, summarize work that has been done by myself and others on biases in medical care price indices. I begin by reviewing various uses of price indices and therefore why biases in the overall indices - and changes in those biases - matter. I then describe briefly the assumptions and theory underlying the official price indices. I next turn to the problems of measuring medical prices, assuming the basic applicability of the theory upon which the official indices are based. Finally I take up the potential inapplicability of the assumptions made by that theory and the resulting issues for measuring medical price changes. I describe an alternative theory and its implications for the measurement of medical prices. I conclude that the biases in the official medical care index, while substantially reduced by recent improvements, likely remain substantial enough to affect the overall official indices in the United States, especially the GDP deflator, where the weight of medical care is around 13 percent.