LAUSR

We investigate alternative methods for constructing quality-adjusted medical price indexes both theoretically and empirically using medical claims data. The methodology and assumptions applied in the formation of the index have substantive effects on the magnitude of the quality-adjusted price changes. A method based on utility theory produces the most robust and accurate results, while alternative methods used in recent work overstate inflation. Based on Medicare claims data for three medical conditions, we find declining prices across each condition when properly adjusted for quality.