1. U.S. BLS Plans for Developing Disease Based Price Indexes Michael W. Horrigan Associate Commissioner May 10 th 2010

2. Presentation Outline Motivation Recommendations for producing disease based price indexes Issues and challenges in estimating disease based price indexes CPI approach PPI approach Concluding remarks 2

3. MOTIVATION

4. National Health Concern 4

5. Health Inflation Compared to Overall Inflation 5

6. Is this price growth alarming? For over forty years, many claim that the CPI Indexes are upwardly biased. Many believe that bias occurs because we use the wrong concept. We price health care services and goods, and not the treatment of the disease. 6

7. Disease based concepts for Medical Expenditure (Triplett, 1999) Patients use medical services for human repair. Consumers use auto body shops for car repair. For a car repair, the consumer pays one price, and the shop buys all the parts and labor to fix the car. Patients do not pay one provider one price for a human repair. They separately purchase physician visits, RX, etc. There is no market price for the entire treatment of diabetes, as there is for a car repair. Triplett suggests reporting by disease and not service. 7

8. Examples of potential upward bias in CPI medical indexes Shift in the treatment of a cataract disease from in-hospital to out-patient facility care reducing the price of treating the disease – Shapiro and Wilcox (2001). Substitution from office visits to the use of pharmaceutical medications reducing the cost of treating mental illness - Berndt et al (2000). 8

9. Major Medical Innovations Affecting Input Use InnovationService/ProductDisease Treated MRI and CTDiagnostic/Phys. Visits various ACE inhibitorsRX/Hospitalshypertension Balloon angioplastySurgery/Hospitalscoronary artery disease StatinsRX/Hospitalshigh blood cholesterol MammographyDiagnosticbreast cancer Coronary BypassSurgerycoronary artery disease H2 blockersRXstomach SSRI anti-depressantsRX/Therapy Visitsdepression Cataract extractionInpatient/Outpatientcataracts Hip and knee replacementInpatient/Outpatientorthopedic BiopharmaceuticalsRX/Hospitals/Phys.mostly cancer

10. RECOMMENDATIONS FOR PRODUCING DISEASE BASED PRICE INDEXES

11. Recommendations Triplett (1999) proposed that BEA and the NHEA report medical expenditures by disease. At What Price (2002), Recommendation 6-1, established a methodology for measuring disease based price indexes.  Use “claims database to identify and quantify the inputs used in” the treatment of a disease.  “On a monthly basis, the BLS should reprice” current medical inputs keeping the quantities fixed.  “every year or two” update the quantities of inputs used to treat a disease.  When updated, “the index will jump at the linkage points.” 11

12. Recommendations CNSTAT panel - Strategies for a BEA Satellite Health Care Account (2009)  Set up to review plans by the U.S. Bureau of Economic Analysis to create a BEA satellite account that reports medical PCE by disease.  Very interested in U.S. BLS Producer Price Index Program to produce disease based price indexes 12

13. ISSUES AND CHALLENGES IN ESTIMATING DISEASE BASED PRICE INDEXES

14. Issues and challenges An episode of treatment often, if not always, cross provider classes  Treatment protocol and reimbursement requirements – Eg., knee replacement surgery  Actual path of discovery and treatment can vary widely 14

15. Issues and challenges Episode of treatments is not a concept for which universe frames exist for drawing stratified probability samples based on revenue. Second best alternative is to aggregate across provider classes by mapping coding structures for each provider to diseases Challenge and growing problem of co- morbidities 15

16. Issues and challenges Protocols for treating disease can change over time  Changes in protocols can occur within and across provider classes  Some changes in protocols may represent a quality change of the same protocol 16

17. Issues and challenges Deciding when a substitution has taken place is difficult  Independent medical expertise  Comparativeness effectiveness research  Penetration rate of substitute protocols  Need to continue pricing the old and new treatment protocols after deciding a substitution has taken place? 17

18. CPI APPROACH

19. Using the Medical Expenditure Panel Survey (MEPS) MEPS does a survey for medical expenditures and medical utilization. Substitutions toward less costly inputs should be in the data. It is representative of the civilian non institutionalized population. It surveys both households and providers on the disease contracted and the use of goods and services to treat those diseases. There is no charge for use. 19

20. Using MEPS to Generate Price Indexes Organized by Disease Merge the MEPS Conditions file and Event Files For each disease get per patient input quantities. Use CPI monthly relatives for physicians, RX, and hospitals to measure monthly price growth. Each year the quantity of the inputs used for each disease are updated. If there is a substitution to a less expensive input, there will be a downward jump in the index. 20

21. Average per Patient Quantities(Utilizations) 1998-2004 21

22. Mental Disorders Example 22

23. Results Expenditure Method Fixed Quantities Quantities Updated Yearly Adjusted for Co- morbidities Total Expenditures 35.85%33.2%30.91% Out of Pocket Expenditures 28.31%31.63%30.57% BLS CPIScope 30.32%30.55%28.81% 23

24. Why Do the Results differ by Expenditure Method? Most of the savings accruing from the shift from inpatient to outpatient hospital goes to third party payments. Hospital prices are rising more rapidly than physician or pharmaceutical prices, and an index based on total expenditures has a higher hospital weight than an index based on out of pocket payments. Therefore both indexes for out of pocket payments are less than the index for total expenditures. Consumers pay a very small fraction of total inpatient expenses. A shift from inpatient to outpatient for a disease category increases the share of out of pocket expenditures for treating that particular disease category. 24

25. Accounting for utilization changes decreases the price index for Diseases of the respiratory system Other conditions Diseases of the circulatory system Diseases of the genitourinary system Neoplasms Diseases of the musculoskeletal system and connective tissue Diseases of the digestive system Diseases of the blood and blood-forming organs Complications of pregnancy, childbirth, and the puerperium Mental disorders 25

26. Accounting for utilization changes increases the price index for Diseases of the skin and subcutaneous tissue Infectious and parasitic diseases Congenital anomalies Injury and poisoning Diseases of the nervous system and sense organs Endocrine, nutritional, immunity disorders (includes diabetes and high cholesterol) 26

27. 27 Key Findings Increased utilization intensity for diabetes, and cholesterol management. Largest index drop in Mental Disorders. The savings to third party payments differs from out of pocket savings. The prices for inpatient hospital services are rising faster than for other services. This has a greater impact on third party payments than out of pocket payments.

28. PPI APPROACH

29. PPI Future plans U.S. Census Bureau is collecting revenue by chapter titles of the ICD-9 manual. BLS can aggregate items from each of the following industries to these same disease categories:  Hospitals (DRGs)  Offices of Physicians (ICD-9, CPT)  Diagnostic Imaging Centers (ICD-9)  Medical Laboratories (ICD-9)  Pharmacies (Primary Therapeutic Equivalent) 29

30. PPI Future Plans When does a substitution take place?  Need for independent judgment on changes in what is a change in the standard treatment protocol.  Plans to continue pricing each item for current medical price indexes even after a directed substitution has taken place and a price drop is recorded. 30

31. PPI Future Plans Quality change  CMS data on adherence by hospitals on adherence to standard protocols for heart attack, heart failure, and pneumonia. Resampling and changes in weights (utilization rates)  Laspeyres fixed quantity formula  Resampling is done every 7 years. 31

32. CPI and PPI Future Plans CPI to update the results of their MEPS based research every year and publish it in a working paper on the BLS web. PPI will get the Census weights in 2010 and begin calculating disease based price indexes in 2011.  Use of MEPS data also being considered 32

33. Disease based price indexes and health care reform CPIs important in measuring whether or not health care reform lowered the out of pocket costs to consumers. PPIs important in measuring the total costs of health care reform no matter the source of financing. 33

34. Contact Information Michael Horrigan Associate Commissioner Office of Prices and Living Conditions 202-691-6960 horrigan.michael@bls.gov

35. The CNSTAT Formulae P dit = Price of input service i used to treat disease d in period t. Q dir = Quantity of input i used to treat disease d in period r. When quantities are not updated: When quantities are updated: 35

36. Example - Mental Illness 36 Price of Office Visit = $200 in period 1; = $220 in period 2. Price of RX = $30 in period 1; = $33 in period 2. The price of all inputs increase 10%. Quantity of Office Visits = 4 in period 1 ; = 1 in period 2. Quantity of RX = 0 in period 1 ; = 4 in period 2. The price of all inputs are up 10%. Disease Based Index: