Are Medical Care Prices Still Declining? A Systematic Examination of Quality-Adjusted Price Index Alternatives for Medical Care

More than two decades ago a well-known study provided evidence from heart attack treatments suggesting that prices in medical care were actually declining, when appropriately adjusted for quality. Our paper revisits this subject looking at a large number of conditions and more recent and more comprehensive data sources to compare alternative methods of quality adjustment. 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 as well as data on medical innovations from over 7,000 cost-effectiveness studies spanning all major condition categories and types of treatment, we find that, when properly adjusted for quality, declining prices from innovation are a prevalent feature of this sector. These findings have important implications for the measurement of medical care output and productivity.