Producing Quality Adjusted Hospital Price Indexes

This paper evaluates the relationship between hospital cost and quality and examines the impact of changing hospital quality on measures of hospital price inflation. To construct the official price indexes, government statistical agencies collect the prices of a fixed sample of goods over time. The price indexes can be biased if the quality of the goods is changing over time. In that case, the price index would reflect unobserved quality change in addition to pure price changes. Cost changes associated with the quality change can be used to quality adjust the price index. Measures of hospital quality are published by the Department of Health and Human Services through its Hospital Compare project. This paper estimates the causal relationship between the quality measures and hospital costs using the instrumental variable technique of Doyle et al. (2015), which is based on plausibly exogenous assignment to different ambulance companies. The relationship between cost and quality measures is then used to produce a cost-based quality adjustment for the inpatient hospital producer price index. The quality adjusted inpatient hospital price indexes increase at an average annual rate of 0.19 to 0.26 percentage points less than the unadjusted index from 2010-2016.