A Regression-Based Medical Care Expenditure Index for Medicare Beneficiaries

We construct a disease-based price index for Medicare beneficiaries using data from the Medicare Current Beneficiary Survey from 2001-2005. We create the index by modeling total health-care expenditure as a function of the diagnoses of 27 illnesses. The coefficients from the regression are used to divide up each beneficiary’s spending (following the method outlined in Trogdon et al. 2008) among his or her diagnosed illnesses. Spending for each illness is then aggregated over beneficiaries. An average price for each illness is calculated by dividing the total expenditure by the number of patients with the illness. We then use the prices to construct a Laspeyres price index for medical care indexed to 2001. This index grows at an average annual rate of about 6% from 2001 to 2005. Average nominal expenditure by Medicare beneficiaries grows at an average annual rate of 8.6% but, after nominal expenditure is deflated with the price index, average real expenditure grows by only 2.3% per year.