Medical Innovation and Growth in Health Care ...

The+Macro+Picture%3a+Medical+Innovation+and+Growth+in+Health+Care+Costs%0d%0aSheila+Smith+Health+Care+Financing+Administration+(HCFA)%0d%0aThe+National+Academies+Board+on+Science%2c+Technology+and+Economic+Policy+%e2%80%9cTechnological+Innovation+in+a+Changing+Medical+Marketplace%e2%80%9d%0d%0a%0d%0aJune+14%2c+2001%0d%0a%0d%0a%0cTechnological+Change+and+Health+Spending%0d%0a%e2%80%a2+An+estimated+%244660+per+person+was+spent+on+health+care+services+in+2000+-+an+increase+of+838%25+from+the+%24497+spent+in+1950+(constant+2000+dollars)+%e2%80%a2+Health+economists+generally+agree+that+the+primary+factor+driving+increased+growth+is+medical+innovation.+%e2%80%a2+In+the+context+of+HCFA%e2%80%99s+longterm+projections+of+health+spending%2c+we+have+two+primary+questions%3a+1.+How+much+of+the+historical+growth+in+real+per+capita+health+spending+is+attributable+to+technological+change%3f+2.+How+is+this+impact+likely+to+change+in+the+future%3f%0d%0a2%0d%0a%0d%0a%0cResearch+on+Medical+Innovation+and+Health+Spending+Growth%0d%0a1.+Micro-level+studies%3a%0d%0a%e2%80%a2Results+consistently+identify+technological+change+as+a+major+factor+in+health+spending+growth+for+patients+with+selected+conditions+%e2%80%a2Can%e2%80%99t+be+generalized+to+the+aggregate+level%0d%0a%0d%0a2.+Macro-level+studies%3a%0d%0a%e2%80%a2Based+on+attribution+of+residual+to+technological+change%0d%0a%0d%0a%e2%80%a2Estimated+role+of+non-technology+factors+subject+to+3+much+uncertainty%0d%0a%0d%0a%0cResidual-based+Estimates%0d%0a%e2%80%a2+Identify+non-technology+factors+contributing+to+growth+in+health+spending%2c+and+estimate+their+contribution%2c+given+a+constant+state+of+medical+technology+%e2%80%a2+Existing+studies%3a+%e2%80%a2+Newhouse+(1992%2c+1993)+Rough+approximation+of+contribution+of+technogical+change+%e2%80%a2+Cutler+(1995)+Lower+bound+for+role+of+technology+%e2%80%a2+Both+studies+recognize+the+uncertainty+inherent+in+the+approach%0d%0a4%0d%0a%0d%0a%0cProject+Hope+(2001)%0d%0a%e2%80%a2+Controls+for%3a+Population+growth+Economy-wide+inflation+Medical+price+inflation+Demographic+factors+(aging)+%e2%80%a2+Both+utilization+of+existing+services%2c+adoption+and+diffusion+of+new+technology+incorporated+in+residual+%e2%80%a2+Uses+price+deflator+based+largely+on+the+CPI-medical%3a+flawed+for+this+purpose%0d%0a%0d%0a%e2%80%a2+Primarily+useful+for+tracking+factors+accounting+for+fluctuations+in+short-term+growth%0d%0a5%0d%0a%0d%0a%0cNewhouse+(1992)+and+Cutler+(1995)%3a%0d%0a%e2%80%a2+Controls+for+a+broad+range+of+behavioral+factors+contributing+to+growth+in+health+spending%0d%0a-Population+growth+-Economy-wide+price+inflation+-Relative+medical+price+inflation+-Rising+insurance+coverage+-Income+effects+-Demographic+effects+-Supplier-induced+demand+-Avoidable+administrative+costs%0d%0a6%0d%0a%0d%0a%0c%e2%80%a2+Generally+consistent+ranges+for+magnitude+of+residual+mask+offsetting+differences+on+key+assumptions%0d%0aNon-technology+Factors+Accounting+for+Growth+in+Real+per+Capita+Health+Spending%2c+1940-1990%0d%0a70%25+60%25+50%25+40%25+30%25+20%25+10%25+0%25%0d%0a%0d%0aIn+co+m+e%0d%0a%0d%0ara+tio+n%0d%0a%0d%0aIn+su+ra+nc+e%0d%0a%0d%0aNewhouse%0d%0a%0d%0aA+dm+in+is+t%0d%0a%0d%0aR+el+at%0d%0a%0d%0aCutler%0d%0a%0d%0a7%0d%0a%0d%0aR+es+id+ua+l%0d%0a%0d%0apr+ic+e%0d%0a%0d%0aA+gi+ng%0d%0a%0d%0aiv+e%0d%0a%0d%0aS+ID%0d%0a%0d%0a%0cRelative+Price+of+Medical+Services%0d%0a1.+Price+data+incorporated+in+the+consumer+price+index+is+flawed+for+our+purposes%3a+estimate+impact+based+on+theory+2.+Price+effect+must+hold+technology+constant%3a%0d%0a-Relative+factor+productivity+(1-2%25+annually)+-Growth+in+relative+factor+rents+(+zero)+-Reduced+quantity+demanded+as+price+increases+(price+elasticity+of+demand+%3d+-0.2)%0d%0a%0d%0a3.+Resulting+estimate+(+63+to+151%25)+implies+that+rising%0d%0arelative+price+can+account+for+8+to+18%25+of+the+total+increase+in+real+per+capita+health+spending+for+1950-2000%0d%0a8%0d%0a%0d%0a%0cIncome+Effects%0d%0a%e2%80%a2+Our+estimate+should+be+1)+applicable+at+the+aggregate+level%2c+2)+hold+technology+constant%0d%0a%0d%0a1.+Micro-based+estimates%3a%0d%0a%e2%80%a2+Consumer+out-of-pocket+share+of+spending+is+small+and+households+with+serious+health+problems+can+expect+to+exceed+OOP+maximums+%e2%80%a2+Exacerbated+by+skewed+distribution+of+health+spending+%e2%80%a2+Income+elasticity+based+on+household+data+likely+to+underestimate+aggregate+income+elasticity%0d%0a9%0d%0a%0d%0a%0cIncome+Effects%0d%0a1.+Macro-based+estimates%3a+%e2%80%a2+Based+on+international+cross-sectional+time-series+data%2c+income+elasticity+generally+ranges+from+1.0-1.6.+%e2%80%a2+Income+effects+due+to+non-price+rationing+measures+that+may+be+relaxed+as+income+rises%0d%0a%0d%0a%e2%80%a2+Not+possible+to+fully+control+for+interaction+effects+between+income+and+technological+change%0d%0a%e2%80%a2+We+use+a+range+from+0.5+to+1.0%3a+rising+incomes+contribute+105%25+to+205%25+to+health+spending+growth%2c+accounting+for+13%25+to+25%25+of+the+total+for+1950-2000.%0d%0a10%0d%0a%0d%0a%0c%e2%80%9cAvoidable%e2%80%9dAdministrative+Costs%0d%0a%e2%80%a2+Defined+to+include+unnecessary+costs+associated+with%0d%0ainstitutional+structures+within+the+health+sector+%e2%80%a2+Should+not+include+costs+of+monitoring+for+purposes+of+limiting+over-prescription+of+treatment%2c+which+are+likely+to+account+for+recent+growth+%e2%80%a2+Himmelstein+and+Woolhandler+(1987%2c1991)+%e2%80%a2+US+access+to+new+and+existing+medical+technologies+with+Canadian+overhead+and+administrative+costs+probably+not+a+feasible+point%0d%0a%e2%80%a2+We+use+an+estimate+of+zero+contribution+to+growth%0d%0a11%0d%0a%0d%0a%0cComparison+of+Results%0d%0aNon-technology+Factors+Accounting+for+Growth+in+Real+per+Capita+Health+Spending+Growth%2c+1940-1990%0d%0a70+60+50+40%0d%0a%0d%0aSFH+(High)+SFH+(Low)+Newhouse%0d%0a%0d%0a30+20+10+0%0d%0an+D+Ag+in+g+pr+ic+In+co+In+su+ra+tra+id+ua+l+e+m+e+nc+e+ti+o+SI%0d%0a%0d%0aCutler%0d%0a%0d%0aAd+m+in+is%0d%0a%0d%0aR+el+at%0d%0a%0d%0a12%0d%0a%0d%0aR+es%0d%0a%0d%0aiv%0d%0a%0d%0ae%0d%0a%0d%0a%0cHistorical+Contribution+of+New+Technology%0d%0a%e2%80%a2+Our+residual+implies+that+approximately+2.2%25+growth+in%0d%0areal+per+capita+health+spending+is+attributable+to+growth+in+technology%2c+within+a+range+of+1.9%25+to+2.9%25+%e2%80%a2+Implication+is+that+technological+change+accounts+for+all+of+the+increase+in+the+health+share+of+GDP+from+4.5%25+in+1950+to+13.1%25+in+2001.%0d%0a%0d%0a13%0d%0a%0d%0a%0cImplications+for+Projections%0d%0a%e2%80%a2+Non-technology+factors+can+be+expected+to+contribute%0d%0asignificantly+less+to+growth+(lower+insurance%2c+income%2c+relative+price+effects)%0d%0a%0d%0a%e2%80%a2+Given+a+constant+exogenous+contribution+of+technological+change%2c+and+slower+growth+in+real+per+capita+GDP%2c+continuation+of+the+historical+contribution+of+technological+change+would+imply+a+faster+increase+in+the+health+share+of+GDP.%0d%0a%e2%80%a2+However%2c+this+approach+omits+the+effect+of+critical+factors+contributing+to+change.%0d%0a14%0d%0a%0d%0a%0cImplications+for+Projections%0d%0a%e2%80%a2+Our+residual+incorporates+any+interaction+effects+between+non-technology+factor+as+well+as+the+effects+of+institutional+change+which+affects+incentive+structures%0d%0a%0d%0a%e2%80%a2+Technological+change+is+more+appropriately+viewed+as+endogenous+to+a+structural+model+of+the+health+sector.%0d%0a%e2%80%a2+Weisbrod+(1991)%2c+and+Baumgardner+(1991)%3a+interaction+between+insurance+coverage+and+nature+of+the+insurance+contract+will+influence+the+process+of+development%2c+adoption+and+diffusion+of+medical+innovations%0d%0a%0d%0a15%0d%0a%0d%0a%0cImpact+of+Managed+Care%0d%0a%e2%80%a2+Research+shows+lower+cost+growth+in+areas+with+low%0d%0aHMO+penetration.+%e2%80%a2+Comparisons+of+either+health+costs+or+diffusion+of+new+technology+for+patients+in+HMO+and+FFS+show+little+difference%3a+spillover+effects+may+be+important+%e2%80%a2+Research+indicates+that+managed+care+reduces+use+of+new+technologies+%e2%80%a2May+not+reduce+growth%3a+ratio+of+use+for+new+technologies+in+managed+care+relative+to+FFS+must+be+below+the+comparable+ratio+for+existing+care.%0d%0a16%0d%0a%0d%0a%0cImpact+of+Managed+Care%0d%0a%e2%80%a2+Much+remains+inconclusive%2c+but+potential+exists+for+substantial+impact+of+effective+management+of+care%3a+%e2%80%a2Long+lags+probable+in+relationship+between+change+in+incentives+and+impacts+on+the+nature+of+technologies+and+their+diffusion.+%e2%80%a2Evidence+suggests+that+application+of+new+technologies+remains+inefficient+at+the+margin%2c+implying+potential+for+reductions+in+cost+growth+with+little+impact+on+outcomes+%e2%80%a2Ultimately%2c+the+ability+to+pay+for+the+development+and+use+of+high-value+innovations+may+rest+on+the+ability+to+control+diffusion+where+value+is+low.%0d%0a17%0d%0a%0d%0a%0c