• Technology and health care costs

    Friday’s reading list included Health Care Spending Growth: Can We Avoid Fiscal Armageddon? by Michael Chernew. It’s well worth a full read and it is ungated. To those keeping up with issues pertaining to health spending levels and increases, their relations across sectors (public/private), their causes, what’s known about the value obtained for the spending, and implications of the new law, there may not be much new in it. But it is a very handy review article nonetheless.

    One passage is particularly insightful:

    Confusion over the distinction between price and quantity is illustrated by comments such as: ‘‘Technology lowers costs in all industries except health care.’’ The statement is most relevant if ‘‘costs’’ are defined as ‘‘prices.’’ It is certainly the case that prices in high-technology industries have fallen dramatically as technology advances. Yet spending in those industries has risen. For example, as technology reduced unit costs in the information technology sector, spending growth in the overall sector increased 26% annually from 1982 to 1996.

    It’s a great point. Technology may or may not be lowering prices in health care, and it is certainly not lowering overall spending. But the claim that technology plays a role in keeping spending in check in other industries is shaky. It’s not doing so in the IT sector, where technology is everything. Even controlling for inflation and population growth, IT spending has grown.

    However, there are areas where technology has reduced prices and real per capita spending. One example is food (see also this). Put it all together and it is not clear we should expect technology to reduce health care spending.

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    • Let’s take something like microprocessors. We see spending raised because we find new uses for the technology…from personal computers to smartphones to extra processing power in our cars, microwaves or video game consoles. With greater volume, the price comes down. It replaces old technology (EFI over a carburetor, for example) when the price is right.

      In healthcare, volume is not discretionary. We’re not going to take more drugs just because we can, nor just because they’re cheap–or, at least, we shouldn’t. Nor is it moral to ask for the average Joe to wait for the price to come down before he is granted benefit of the latest medical advance.

      Nobody is going to die is he drives a normally aspirated car, rather than an electronically fuel injected one. But he might if he doesn’t get an MRI.

    • Increased spending is not a problem per se when costs are declining given value is also increasing. It is when costs are not declining with increased spending that we have a problem. This is exactly what is happening in the health-care sector.

    • Digital mammography is a good example of the “exceptionalism of medical treatment” when it comes to price defeating cost.
      Digital mammograms required new equipment and are reimbursed at 150% of older “analog” mammograms (which also required new equipment in their day). However, once the equipment has been purchased, the incremental cost of a digital mammogram is less since no film or processing is required. However, the price differential persists and no benefit accrues. (In addition, it appears that the digital mammograms are no better than the older analog mammograms at detecting disease.
      The medical industry increases profits, patients have no better care.

    • I am not convinced that health care per capita spending will continue to increase faster than inflation. IMO there is not that much cutting (surgery) that can be done that is not done. New ways of controlling cancers are likely to less expensive and more effective than the current methods. It is my impression that the rate of new drugs coming to the market has slowed and the existing drugs will go off patent. I think that medicine may soon peak as a percent of GDP.

    • Also more and more people are making living wills.