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]