Price Indexes for Drugs: A Review of the Issues

Price indexes provide a way to summarize changes in prices of individual goods and services using an aggregate statistic. An important use of these indexes is to decompose changes in spending into price and quantity components. Price indexes have roles in many areas, including in the National Income and Product Accounts and National Health Expenditure Accounts. Health economists have also used similar decompositions to inform policy debates about which levers may be used to contain cost growth. There are three particular issues that arise when discussing price and quality change. The first is deciding which particular formula and weights is most appropriate in constructing the index. Secondly, some price changes are accompanied by changes in the quality of goods. And lastly, price indexes for medical care do not have a clear link to patients’ welfare. Therefore, this paper focuses on the measurement issues, how the indexes are constructed, and how they may be used to decompose the growth in spending into price and quantity components.