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Don't Blame Health Care Costs on Technology


Over at Forbes, Tomas Philipson notes that with or without Obamacare, US health care costs will still skyrocket over the coming decades. Health care liabilities will continue to push federal deficits far over tax revenues, and private spending will rise similarly. What’s causing this? Philipson has an answer:

Surprisingly, the health policy community largely agrees on what is driving this substantial growth in health care spending. It is not that we are aging, that we are richer, or that we have more generous insurance coverage. Rather, it is medical innovation that is the key driver of spending growth, although such innovations are of course induced by these other factors raising demand. Harvard economist Joe Newhouse and colleagues documented that during a period when US per-capita health care spending grew by about 800%, three-quarters of the growth in spending was attributable to other causes than an aging population, expanded insurance coverage, or rising per-capita income. According to the health policy community, the main suspect was medical innovation.

This line of thinking is important, both because it points to a crucial health care policy truth, but also because, wrongly understood, it could undermine some of the best hopes we have for bringing down costs. The truth behind this passage point needs to be stated more precisely: the combination of induced demand with proliferating medical technologies has raised costs. The problem isn’t the technology per se, but the lack of price signals in our system.

Without price signals, consumers have little financial incentive to make sure they really need the new, more expensive treatments and technologies providers over. At the same time, hospitals have every incentive to over-use expensive medical equipment in order to recoup the investment they made when they bought it. It’s a perfect storm of financial incentives, new treatments and technologies, and induced demand.

Luckily, there’s a way out of this, if we match the right kind of consumer-oriented reforms to emerging e-health technologies. By opening up the health care system to price signals at the same that we integrate e-vists, 3D printing, and smartphone apps into our health care system, we can empower consumers and streamline the delivery of care. That winning combination can help address the problem Philipson is gesturing towards, and finally bend the cost curve in a meaningful way.

[Hospital technology image courtesy of Shutterstock]

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  • Reticulator

    Thank you, Professor Mead

    Market mechanisms that allow a maximum of personal choice won’t fix everything that we want fixed about our health care system, but the strategy of the left seems to be to say that since they don’t solve every health care problem, we won’t let them play any role in health care at all.

  • ljgude

    Well, since prices are arbitrary and high – generally double those of other 1st world countries – we are being overcharged about 5% of GDP. Transparency, competition, and price signals all could help get rid of the overcharging.

    • Corlyss

      What’s your basis for claiming prices are arbitrary?

      • Andrew Allison

        The evidence, cited by VM recently, of the quite remarkable inconsistency of said prices?

        • ljgude

          The article in Time magazine called Bitter Pill by Steven Brill is my source for my assertion that charges are arbitrary.

          A chart showing how the US pays double is here:

          Thanks for asking. I recognize both of you s long time VM commenters. The healthcare itself in the US is excellent and produces only slightly worse outcomes than the OECD countries on the chart despite not covering everybody. The medicine is superb, it is the pricing that is way out of line. I live in Australia and we have both a public and a private system which compliment each other. If I survive an emergency like a car accident the ambulance will take me to the nearest public hospital and they will do a first class job of trying to fix me up. I will spend zero time worrying about the cost. There will be none. In reality I am having a pacemaker put in next week in the private system with my chosen doctor and with a very low cost paid by my private insurance which costs about $2000 a YEAR. No waiting, choice of doctor. I’m 71.

          • Corlyss

            Thanks. I wanted to read something about the inconsistency in pricing.

        • Corlyss

          Prices for the same operation/procedure can be inconsistent from provider to provider, state to state, and community to community without being arbitrary. The same price for the same operation/procedure by the same provider to different patients could be arbitrary.

  • Corlyss

    “it could undermine some of the best hopes we have for bringing down costs.”
    Obamacare’s anti-innovation policies are doing that quite effectively without any help from a policy overtly hostile to technology.

  • Jacksonian_Libertarian

    Good, I’m glad to see you talking about the “feedback of competition” as it is expressed in price signals. Consumers are too insulated from the price of their healthcare by their insurance, and prices are mostly hidden from the consumers, for the “feedback of competition” to create the continuous improvements in Quality, Service, and Price we expect from a free market.

  • Andrew Allison

    This Quick Take and the commentary to which it refers, put the cart before the horse. Our so-called “healthcare system” is so incredibly distorted that we are spending money we don’t have to develop treatments we can’t afford.

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