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...data. Measures of input use are discussed and productivity growth estimates are presented for the period 1998/9-2003/4. The paper concludes that available data are unlikely fully to capture quality improvements.
Keywords: Health output; productivity; quality adjustments
JEL classifications: D24; 111; L8
1. Introduction and context
Previous papers in this issue have set out the methodology and results from applying the standard growth accounting approach to measuring productivity. The EU KLEMS database includes estimates of output and productivity growth for the non-market services including public administration, education and health and social services, employing data from the National Accounts in each country. However, output in these services is known to be very poorly measured with little yet by way of international consistency. This is now changing following the guidelines set out in the Eurostat (2001) Handbook on price and volume measures in National Accounts and the publication of the Atkinson Review (Atkinson 2005)--see discussion below.
Measurement of output and productivity in non-market services is not just of interest to those working within the national accounts tradition but is also important for policymakers charged with providing, funding and/or regulating these services. In March 2004 the UK Department of Health (DH) commissioned a research team from the Centre for Health Economics at the University of York and the National Institute of Economic and Social Research to develop new approaches to measuring NHS outputs and productivity. This paper summarises the main findings from that work. The main focus of this paper is to set out the methodology put forward by the research team to measure outputs and inputs and presents a few sample results for the UK NHS. Readers interested in details of the methods, data and calculations should consult the final report to DH, Dawson et al. (2005), and the method applied to selected health treatments in Castelli et al. (2007).
The Eurostat Handbook made important recommendations on measurement of non-market output. For purposes of national accounting the preferred method is to measure outputs (e.g. treatment received by a patient) rather than activities (number of operations or prescriptions), and outputs should be quality adjusted. Eurostat deemed the previously widely employed method of measuring outputs by inputs as unacceptable and as a result EU countries are moving away from this method in large areas of non-market services in the direction of the preferred method. (1) In major respects Atkinson (2005) recommended a methodology for measuring NHS output growth advocated in the preliminary reports of the York/NIESR team as applied to health services, as detailed below.
In this paper we formulate an index of health service productivity that incorporates quality change and calculate the annual value of this index for the English NHS from 1997/8 to 2003/4. The next section describes the approach taken to output measurement and we then describe the data used to populate the output index (section 3) and the results (section 4). The input index, its construction, data and sources are briefly described in section 5, which also includes estimates of NHS hospital sector productivity growth. Concluding comments are offered in section 6.
2. Measuring output
An aggregate indicator of the movement of the output of an industry which produces a range of goods is constructed by measuring the percentage volume change in each output and weighting the resulting percentage changes by the share of the value of each product in the value of total output. Thus, in Laspeyres form, where activities are valued in the base period, the index takes the form:
[I.sup.1] [J.summation over j=1][x.sub.jt+1][v.sub.jt] / [J.summation over j=1][x.sub.jt][v.sub.jt] (1)
where [x.sub.jt] is the volume of output j in period t, and [v.sub.jt] is the marginal social value of output J. For many goods and services, prices are taken to reflect the consumer's marginal willingness to pay for them. So, in the National Accounts, prices are used to value private sector output. But consumers do not face full price for goods and services that are financed by the public sector so values must be imputed in other ways. Eurostat recommends the use of unit costs for this purpose. In this case the output index becomes:
[I.sup.2] [J.summation over j=1][x.sub.jt+1][c.sub.jt] / [J.summation over j=1][x.sub.jt][c.sub.jt] (2)
where [c.sub.jt] is the cost of output j at time t. There are two major deficiencies with this approach. First, it is questionable whether costs are proportional to marginal social values. Proportionality requires the use of marginal costs and that public sector resources are allocated in line with social preferences (i.e. that the system is allocatively efficient). Second, the index takes no account of changes in quality. For example, when the health system adopts more cost effective ways of treating patients, a cost weighted output index may record a fall in output, depending on the relative magnitudes of unit cost reductions and increased treatments.
It is helpful to distinguish between activities (operative procedures, diagnostic tests, outpatient visits, consultations), outputs (courses of treatment which may require a bundle of activities), and outcomes (the characteristics of output which affect utility). The distinction between outputs and outcomes is identical to that between goods and characteristics in consumption technology models (Deaton and Muellbauer, 1980, Ch. 10; Lancaster, 1971) where consumers value goods because of the bundle of characteristics that yield utility.
Measurement in the private sector focuses on outputs rather than the characteristics they produce because of the assumption that the market price of the output measures the consumers' marginal valuation of the bundle of characteristics from consuming the output. In the private sector we do not need to concern ourselves with measuring characteristics or counting activities because they are embodied in the outputs which are produced and the prices at which they are sold. In the public sector there are no prices to reveal patients' marginal valuations of services so we have to find other means of estimating their value and we define the quality of the output as a function of the vector of outcomes it produces. This means that values can be found by combining information on outcomes with that about outputs or activities; see the discussion for the health sector in Triplett (2001) or non-market services in general in O'Mahony and Stevens (2006).
How do we combine information on outcomes with outputs? We can do so in two equivalent ways: we can measure the outputs and attempt to estimate the marginal valuations attached to them, or we can measure the outcomes produced by each unit of output and attempt to estimate marginal valuations of the outcomes. The bundle of outcomes produced by a unit of output is likely to change over time in the health sector because of, among other things, changes in technology or treatment thresholds. In a private market the price of output would change to reflect this. But in the absence of market prices for health sector outputs it is likely to be easier to calculate the change in the marginal value of output by focusing on the change in the vector of outcomes. We show below how the changing mix of outcomes (quality change) may be allowed for in principle. We discuss in section 4 how quality adjustments based on the currently available data can be incorporated into an output index and show the results of applying these methods to calculate experimental quality adjusted indices....
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