A Systematic Examination of Quality-Adjusted Price Index Alternatives for Medical Care Using Claims Data

We investigate alternative methods for constructing quality-adjusted medical price indexes both from a theoretical perspective and empirically usingmedical claims data. A method based on utility theory produces the most robust and accurate results, while the alternative methods used in recent work overstate inflation. Based on claims data for three medical conditions, we find declining prices across each condition when properly adjusted for quality. The methodology that is applied and assumptions made in the formation of the index have substantive effects on the magnitude of the quality-adjusted price index