Technology & Cost Containment—Why Doesn’t Medical Technology Bring Down the Cost of Healthcare?

Capture14Technology is a significant driver of high health care spending. For instance, many treatments common today were not available 40 years ago. Yet, treatments and therapies that have been in use for decades are still quite expensive. In typical consumer markets, the quality of technology gets progressively better while the (real) inflation-adjusted prices often fall as older technology is surpassed by newer technology. This is especially true of consumer electronics but also of true of automobiles, appliances and other types of consumer goods. The inflation-adjusted prices of consumer goods have held steady because consumers are price sensitive, rewarding the firms who successfully compete for their business.

In addition, information technology has boosted productivity in many industries making them more efficient. Although health care systems use information technology, it has hardly changed the way patients are treated. Patients often encounter the health care system the same way their grandparents did 50 years ago. Telemedicine is often used as a last resort rather than the first option.

Health economists believe third party payment plays a role in keeping health care expensive — as well as keeping it inconvenient. Patients are insulated from the cost of care in many countries. Third party payment is common in the United States, where 88% of health expenditures are paid by someone other than the patient.  Third-party payers set the terms of care; establish which treatments they will pay for and negotiate how much they will pay. When patients are not their primary customers, it is not in health care providers’ self-interest to compete on the basis of price. Instead, competition takes the form of providers seeking to maximize revenue against third parties’ reimbursement formulas, which are often negotiated discounts off disaggregated list prices.

Regulations also plays a role in keeping medical technology expensive. Medical technology firms and drug makers cannot innovate as easily as their counterparts in consumer markets. New drugs and medical technology must be approved by the U.S. Food and Drug Administration or other regulatory bodies. Doctors and other health care works are licensed, also creating barriers to entry.

Faced with the aforementioned constraints, different countries use a variety of methods to hold down the cost of medical care. These range from individual patients exposed to cost-sharing; private third-party payers negotiating the terms of reimbursement; monopsonistic (single-payer) price controls; to outright rationing of equipment and services to those most in need or those who wait in queues. This presentation will discuss many of these methods and what can be done to encourage competition in the medical industry.

This post is the abstract from my presentation at the May 4th conference, Healthcare in Hungary: Are There Any Lessons From Abroad? sponsored by the Danube Institute, Budapest Hungary.


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  1. Paul Nelson says:

    A small, but significant number of medical centers that are defined by their involvement in highly complex healthcare purposely have high prices because of the persons who come from around the world who pay with cash. The sentinel event process triggers an industry wide effort to attract these patients. And, this is used during their negotiations within the health insurance industry to negotiate for higher reimbursement. The insurance companies and their corporate leadership do not want to risk a cancelled contract to preserve their marketing advantage. The co-dependency is subtle but real. Since the entire health industry has no historical involvement in financial risk management, other than the HMO days of the 1990s, there is rather fundamental push back within the industry. As such, Parkinson’s Law prevails unabated. As a portion of our nation economy devoted to health spending, it was 6.0% in 1960 and 18.2% in 2016. This equates to a 1.98%, annually compounded, increase more than economic growth. I suspect it is the main driver of our nation’s sluggish growth since the last recession in 2009.
    So, historically we have a recession every 8 years. Maybe the only way to put it off is to build an appropriate risk-management strategy that equitably and justly involves all of the players. It begins with the use of a Power Law Distribution curve. All of our reform efforts are focused on the @5% of citizens who use @70% of healthcare resources with no real focus on the @50% who use @5% of these resources. Every other developed nation has a nationally sanctioned means to promote equitable available Primary Healthcare, community by community. We DO NOT!

  2. Barry Carol says:

    It’s important to note that advances in medical technology including new drugs, devices and less invasive surgical techniques, lengthen the lives of patients who would have otherwise died sooner without them. Once they die, of course, their healthcare costs cease as well. If they live longer, they have more time to incur other medical costs including expensive long term custodial care associated with Alzheimer’s, dementia, and the simple frailty of old age.

    If I remodel my kitchen with the latest appliances and gadgets, it doesn’t lengthen my life. If I buy a new more energy efficient air conditioning unit, it doesn’t lengthen my life.

    Sure healthcare costs would be lower if patients paid their own bills out of pocket but many and probably most can’t afford to pay for the big stuff. If there were no insurer to pay, maybe a lot of these new drugs and devices would never have been developed in the first place. Is that a good thing? Probably not.