Spending on medical care is a large and growing component of GDP. There are wellknown measurement problems that are estimated to overstate inflation and understate real growth for this sector by as much as 1-1/2 percentage points per year. Because of its size, this would translate into an overstatement of inflation for the overall economy of about ¼ percentage point with an equal understatement in real GDP growth. In this paper, we use data from the Medical Expenditure Panel Survey to obtain new, more comprehensive estimates for this bias and to explore a possible adjustment to existing official price indexes. The MEPS data show an upward bias to price growth in this sector of 1 percentage point, which translates into an overstatement of overall inflation of. 2 percentage point and an understatement of GDP growth of the same amount. We also find that an adjustment recently used in Bradley et al provides a useful approximation to the indexes advocated by health economists.

1 We are grateful to AHRQ for access to unpublished diagnosis codes that allowed us to do this study. We also thank Ray Kunze for helpful comments and guidance, Stephen Heffler for comments and Matt Lebowitz for excellent research assistance. The views expressed in this paper are solely those of the authors and do not necessarily reflect the views of their respective agencies.* Corresponding author: ana. aizcorbe@ bea. gov, Bureau of Economic Analysis, 1441 L Street, NW, Washington DC