InflationandDiscounting-PennMedicine.pdfVIP

Inflation and Discounting Henry A. Glick, Ph.D. Pharmacoeconomics September 25, 2013 /dgimhsr Which Lottery? ? Lottery A: $50,000 per year for 20 years ? Lottery B: $1,000,000 immediately – Probability of winning is identical – Equally priced – Tax free winnings Comparison of Costs and Outcome in Multiple Periods ? Because costs and outcomes in different time periods are not directly comparable, their comparison requires conversion to a common time period ? Conversion accounts for: – Changes in purchasing power of dollar over time: Inflation ? e.g., consumer price index – Time preference (social discount factor) ? Discount streams of cost and outcome because we value them differently depending upon when they occur ? Inflation is not same as time preference 1 Inflation ? Inflation accounts for fact that purchasing power of a dollar changes over time – Stream of dollars without inflation adjustment: Nominal $ – Stream after inflation adjustment: Real $ ? Common measures of inflation – Consumer price index ? Defined for a market “basket” of goods and services – Gross domestic product deflator ? Not based on a fixed basket of goods and services – Between 1990 and 2006, difference between 2 within +5% Inflation: U.S. Consumer Price Index All Medical Care Year Items Medical Care Services 1995 152.4 220.5 224.2 2000 172.2 260.8 266.0 2005