Economics - General

Expenditure vs. Price Index

Can health care productivity be increasing even as costs are rising so fast?  This may be the case.   One study by Aizcorbe and Nestoriak (2011) examines this phenomenon.

Using retrospective claims data for a sample of commercially insured patients, we find that, on average, expenditures to treat diseases rose 11% from 2003Q1 to 2005Q4 and would have risen even faster, 18%, had the mix of services remained fixed at the 2003Q1 levels.  This suggests that fixed-basket price indexes, as are used in the official statistics, could overstate true price growth significantly.

Much of the decrease in cost to treat specific conditions come from a shift of patients from inpatient care to outpatient surgical centers.  The question is, was this change a one time productivity gain, or does the health care system have other options for improving productivity (in the sense of reducing cost for the same quality).  It could be the case that Health IT and electronic medical records could produce synergies.  Alternatively, more intensive use of physician assistants and nurse practitioners could reduce the cost of treating many conditions.  We will see what the future holds.

Notes: The authors analysis uses the Symmetry grouping algorithm to define episodes of care.  By using the groupers, the authors are not required to have extensive medical knowledge to perform this analysis.   On the other hand, because the groupers are proprietary, the algorithms can be seen as a ‘black box.’

The formula used to estimate the expenditure and price indices are:

  • Price: {Σcd2xd1/N1}/ {Σcd1xd1/N1}
  • Expenditure: {Σcd2xd2/N2}/ {Σcd1xd1/Nd1}

Where cdt is the cost per episode of type d in year t, xdt is the number of episodes with disease d in time t, and
Nt is the total number of beneficiaries in time t.


  1. Applying care in lower fixed-cost settings may improve your return on assets, but it is only a nominal productivity improvement. Changes to care delivery must add real economic value and tangible, measurable improvements in outcomes. The site of care will affect the provider and procedure mix to some degree, e.g., more ambulatory surgeries and more mid-level care-givers, but will produce no meaningful changes.

    It is a akin to making more smaller cars in a newer factory with less union labor than it is to making fewer, better cars for fewer drivers in a sustainable, diversified transportation system.

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