Adjusting the Measurement of the Output of the Medical Sector for Quality: A Review of the Literature

The Bureau of Economic Analysis recently created new price indexes for health care in its health care satellite account and now faces the problem of how to adjust them for quality. I review the literature on this topic and divide the articles that created quality-adjusted price indexes for individual medical conditions into those that use primarily outcomes-based adjustments and those that use only process-based adjustments. Outcomes-based adjustments adjust the indexes based on observed aggregate health outcomes, usually mortality. Process-based adjustments adjust the indexes based on the treatments provided and medical knowledge of their effectiveness. Outcomes-based adjustments are easier to implement, while process-based adjustments are more demanding in terms of data and medical knowledge. In general, the research literature shows adjusting for quality in the measurement of output in the medical sector to be quantitatively important.