ACADEMIA ECONOMIC PAPERS March MEDICAL CARE PRICE INDICES PROBLEMS AND OPPORTUNITIES

There are numerous sources of bias in medical care price indices that lead to non-trivial biases in overall price indices such as the GDP deflator and the Consumer Price Index. I begin by reviewing various uses of price indices and therefore why both biases and changes in those biases matter. I describe the theory underlying official price indices. I next turn to problems of measuring medical prices, assuming the applicability of the theory upon which the indices are based. Finally I take up the potential inapplicability of the assumptions made by that theory. I describe an alternative theory and its implications for the measurement of medical prices. I conclude that the biases in the official American medical care price indices, while reduced by recent improvements, likely remain substantial enough to affect the overall indices, especially the American GDP deflator, where the weight of medical care is around 13 percent.