Modernizing the Consumer Price Index for the 21st Century (2022) / Chapter Skim
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5 Modernizing Difficult-to-Measure Expenditure Categories: Medical Care
5 Modernizing Difficult-to-Measure Expenditure Categories: Medical Care
Pages 105-140
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for measuring health insurance costs faced by consumers. In particular, we focus on the pros and cons of two different conceptual frameworks for pric ing health insurance: the indirect method, currently used in the CPI, and the direct method, currently used in the Producer Price Index (PPI)
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It is worth reiterating, however, that alternative data sources could be helpful for gauging quality change, allowing for a more careful and detailed tracking of the characteristics of medical care inputs that consumers purchase -- such as insurance p olicies -- and of the outcomes experienced by consumers who undergo various medi cal procedures and other treatments. A00858 -- Consumer Price Index REV.indd 108 8/15/22 11:54 AM
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It can be thought of as the implicit service charge for the services provided directly by the health insurance industry, net of the medical services that are bundled with the premium. A00858 -- Consumer Price Index REV.indd 109 8/15/22 11:54 AM
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Several concerns have arisen concerning use of this indirect method. One is that the data on retained earnings are compiled annually and are available only with a considerable lag (about 10 months)
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usingimportance of components in medical care CPI, December 2020. SOURCE: Panel-generated using BLS data.
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Unlike the indirect method, the direct method prices health insurance premiums as a whole rather than as a residual. The method involves, first, selecting a set of health insurance policies to price, then, for each policy, tracking the price of the policies over time holding constant the age, health conditions of the applicant, coverage, deductibles, and copays.
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We view that as a policy question that is beyond the scope of this chapter. A00858 -- Consumer Price Index REV.indd 113 8/15/22 11:54 AM
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In order to provide a meaningful conceptual comparison between the two methods, we focus on the "whole policy" price under the indirect method -- that is, the weighted average change in the price of CPI "health insurance services" and the price of the medical services financed by health insurance. This is the price change the indirect method implicitly uses for the change in price of health insurance policies and is directly comparable to the price change under the direct method.
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SOURCE: Panel-generated using BLS data. SOURCE: Panel-generated using BLS data.
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If health utilization increases over time for a given set of policy attributes, the direct method will attribute those increases to health insurance prices. In contrast, under the indirect method, expected changes in utilization that do not affect retained earnings per unit of medical care are not counted as an increase in the "whole price" of health insurance (the health insurance services plus the medical services financed through insurance)
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For example, the improvements in cataract surgery described above occurred gradually throughout the 1970s, 1980s, and 1990s, and it is very unlikely that the direct method would adjust for these types of quality and quantity changes. A00858 -- Consumer Price Index REV.indd 117 8/15/22 11:54 AM
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. Thus, the indirect method asks: What were the costs of health insur ance services per unit of medical services for someone who bought a health insurance policy in a particular year?
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Quality Adjustment Problems Using the Indirect Method Although the discussion above suggests that the indirect method is less likely to conflate increases in quantity and quality with prices, it is not perfect. The indirect method relies on CPIs from BLS for physician ser vices, hospital services, prescription drugs, and other costs to capture the changing prices of the medical services provided through health insurance.
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would have overstated inflation in health insurance costs substantially more than the indirect method. In an attempt to provide more intuition about the two methods, Table 5-1 provides some examples of how different types of changes in health spending affect measured health prices using the indirect and direct meth ods.
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Anticipated increased price and quality/intensity of care Higher None Higher Higher Price Higher Price Ambiguousa within a service that BLS prices like a doctor's visit, hip replacement, stent, etc. Unanticipated increased utilization (more surgeries, more None Lower None None Lower Price None tests, etc.)
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This can be seen by noting that prices do not appear in the comparison between direct and indirect methods (see Appendix 5B)
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A Suggested Alternative Indirect Method As shown in Appendix 5B, the indirect method -- as currently imple mented by BLS -- prices the cost of health insurance services per unit of health care. If the services provided by health insurance are considered as primarily related to claims processing and other administrative costs, this makes sense.
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16 Companies that act as a servicer for self-employed plans are likely in the PPI, although their weight is likely to be very low because their revenues will not include any costs of medi cal care. A00858 -- Consumer Price Index REV.indd 124 8/15/22 11:54 AM
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Timeliness One disadvantage of the indirect method is that retained earnings are only measurable after the fact. That is, when an insurance company sells a policy, the company does not know what its retained earnings (premiums less benefits)
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The data on rebates used in the PPI should be used to adjust retained earnings in the CPI. Falling Response Rates As discussed above, survey response rates from health providers have been falling in recent years, making the prices on which the indirect method relies increasingly variable and possibly unrepresentative.
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The above recommendation notwithstanding, the panel recognizes that fall ing response rates are making reliance on the indirect method increasingly 20 www.cms.gov/newsroom/press-releases/cms-oppsasc-final-rule-increases-price-trans parency-patient-safety-and-access-quality-care. A00858 -- Consumer Price Index REV.indd 127 8/15/22 11:54 AM
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To better capture what the consumers actually pay for insurance, and which does not depend on utilization rates, BLS should explore using a multiyear rolling average of retained earnings per unit of health services (where retained earnings A00858 -- Consumer Price Index REV.indd 128 8/15/22 11:54 AM
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would help smooth out any noise in the quarterly patterns of retained earnings. A first step in this work is to test the performance of estimates based on disaggregated financial statement data against those based on the lagged A00858 -- Consumer Price Index REV.indd 129 8/15/22 11:54 AM
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And because the indirect method is already an ex post measure of health insurance costs, it seems clear that the measure of retained earnings used in the calculation should be after subtracting rebates. BEA has bought information on rebates that should be accessible by BLS as well.
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The authors constructed price indexes using "data purchased from an insurance company for a large city and compare them to the CPI medical indexes for that city" with the aim of assessing their feasibility for use on a larger scale. A00858 -- Consumer Price Index REV.indd 131 8/15/22 11:54 AM
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To compare the indirect method to the direct method, it is necessary to calculate the implied price index for the whole health insurance premium under the indirect method. Call the ratio of retained earnings to the health RE .
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(5.11) P t−1 RE t−1 M ,t−1 t−1 B t −1 This expression can be rewritten as follows:26 Price Relative for Whole Health Insurance Policy Premt using Indirect Method = Premt−1 QM ,t QM ,t−1 That is, under the indirect method, the increase in the total cost of health insurance is equal to the increase in the premium cost per unit of health services.
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27 Prem t−1 Calling the indirect price relative for the whole health insurance policy Ind and the direct price relative D -- and abstracting from the fact that the indirect method does not measure the change in retained earnings on a pol icy-by-policy basis, and instead uses a unit cost method -- one can see that: D Ind = QM ,t .
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Unexpected price changes: Unexpected price changes for medical care ser vices typically do not affect premiums or utilization very much.28 Thus, they have no effect on either the indirect or direct method prices for the whole insurance policy. Note, however, that unexpected increases in price will lower the health insurance component of the whole health insurance policy using the indirect method (because they lower retained earnings)
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Then, when using the indirect method, the change in the price of health insurance services would simply be the change in retained earnings per policy. In particular, using the notation from Appendix 5A, this would then make the Alternative Price Relative for Whole Health Insurance Policy us ing the Indirect Method equal to: RE PM ,t zt−1 t + (1 − z )
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zt−1 t + (1 − z t −1 ) REt−1 Bt−1 The comparison between the two equations shows that under this alterna tive formulation, the pricing of the insurance component of the indirect method and the insurance component implicit in the direct method would be the same -- they would both measure the changes in the cost of insurance services to each policy holder.
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