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

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Technology 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 Budapest Institute, Budapest Hungary.

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