Modernizing the Consumer Price Index for the 21st Century (2022) / Chapter Skim
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Pages 109-120
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From page 109... ...
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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From page 110... ...
For example, for physician services, BLS obtains prices for the same service at the same physician over time. To calculate the price of health insurance services, BLS uses estimates of changes in the ratio of insurance company retained earnings to medical benefits, which they collect once a year.5 This annual relative is converted to a monthly relative for the regularly published CPI by assuming a smooth change in prices over the year.
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From page 111... ...
usingimportance of components in medical care CPI, December 2020. SOURCE: Panel-generated using BLS data.
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From page 112... ...
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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From page 113... ...
Because the CPI is intended to be a conditional cost-of-living measure, an ideal index would fully control for changes in quality and utilization over time, and we evaluate the two methods under this framework.6 It is worth noting that BLS has been weighing the relative merits of the different approaches to pricing health insurance for some time. In response to the Boskin Commission's (Advisory Commission to Study the Consumer Price Index, 1996)
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From page 114... ...
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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From page 115... ...
SOURCE: Panel-generated using BLS data. SOURCE: Panel-generated using BLS data.
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From page 116... ...
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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From page 117... ...
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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From page 118... ...
. 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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From page 119... ...
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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From page 120... ...
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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