Adjusting the Measurement of the Output of the Medical Sector for Quality: A Review of the Literature

In January 2015, the Bureau of Economic Analysis released the first version of the health-care satellite account, which redefines the good being measured in health care output in the national accounts from a single service to an episode of treatment of a specific medical condition. This change follows multiple recommendations by the Committee on National Statistics and by international authorities on national accounting as applied to medical care. BEA now faces the difficult problem of how to adjust the price indexes for the quality of health care. In this paper, I review and summarize a number of previous papers that created quality-adjusted price indexes for individual medical conditions. It divides them into those that use primarily outcomes-based adjustments and those that use only process-based adjustments. Outcomes-based adjustments adjust the indexes based on observed aggregate health outcomes, usually mortality. Process-based adjustments adjust the indexes based on the treatments provided and medical knowledge of their effectiveness. Outcomes-based adjustments are easier to implement while process-based adjustments are more demanding in terms of data and medical knowledge. In general, the research literature shows that adjusting for quality in the measurement of output in the medical sector to be quantitatively important.