Defining Disease Episodes and the Effects on the Components of Expenditure Growth

To better understand productivity and inflation in the health sector, health economists have advocated tracking the cost of treatment by disease over time. However, there are several methods for measuring the cost of treatment, and little work has been done to understand how different approaches affect disease-price inflation. In this paper we compare various methodologies for allocating expenditures to disease episodes and their effect on disease-price inflation for a sample of commercially-insured individuals over the 2003 to 2007 period. We find that the selected allocation method impacts inflation rates, but the annual growth rate stays within the range 2.9 to 3.9 across a variety of methods. The paper highlights various issues and trade-offs that may be useful when selecting among the different approaches.