Technology Driving Health Care Spending — or Vice Versa

It’s often said that the demand for technology drives the level of health care spending in the United States. This argument may be completely backward, thus focusing our health care debate on symptoms while ignoring the underlying maladies.

The United States spends more on health care per capita, and as a share of gross domestic product, than any other country. Yet, compared to other advanced countries, we use smaller quantities of most resources — shorter hospital stays, fewer doctors and nurses, etc. The one area where we spend much more is technology, and especially when it comes to the latest and best technology.

(By the way, while American health care has plenty of problems, it does not, as some contend, yield worse outcomes than other countries. More on that another day.)

From these facts, many conclude several things: First, we spend too much on health. Second, new technologies cause this purported overspending. Third, if government restricts technology prices and quantities, this will reduce overall health care spending. All of these claims are suspect. To explain why, let’s begin with an analogy — my spending on consumer electronics.

In 1983, with a modest income, I purchased a Kaypro II computer and some peripherals for around $3,000 ($7,500 in today’s money). Over the next decade, I bought a CD player and a few other inexpensive items. Gradually, my income grew, and the cost of computing plunged astronomically. My iPad 2 cost around $500. In 1983, an iPad’s computing power would have cost roughly $100,000,000. ($100,000,000,000,000 in 1950.)

Plunging electronics prices didn’t cut my spending, however — either in raw amounts or as a percentage of my income. Today, I buy multiple computers, smartphones, musical instruments, televisions, audio equipment and medical devices, not to mention cable and streaming services to feed them.

New technologies don’t cause me to buy these things. I decide each year how much to save for the future and how much to spend on consumables. As Moore’s Law pushes the cost of electronics down, my spending doesn’t drop; I just buy more stuff with vastly greater computing power.

Spending a greater percentage of income on electronics today than I did in the 1980s isn’t a problem. If I stopped saving for the future and spent it even more on electronics, I couldn’t blame technology. It would simply be my spendthrift habits, leading to more electronics purchases.

So it is with health care. Health care is not getting more expensive. (A human genome scan cost around $1,000,000,000 in 2000; today, it’s just over $1,000.) Like my electronics purchases, Americans simply choose to spend more on health care. If the government forced drug and device companies to sell their wares for less, it’s likely that we would simply buy more of it — or buy other things.

Our health care spending habits begin with our incomes. Then we Americans decide how much to save. Forty years ago, our savings were similar to those of other advanced countries, and our health care spending wasn’t too different, either. Since then, we’ve decided to save less, thus increasing our consumption of everything, including health care. Just as I spent more on electronics as my income increased, so we Americans — wealthier than ever — spend more on health care. We’ll spend less on health care and medical technologies when we decide to save more, and probably not until then.

Meanwhile, government efforts to contain health care spending may have the effect of preventing the costs of care from declining the way costs have dropped in information technology. If Medicare says, “We’ll pay $100,000 for a cardiac bypass and no more!” the long-term effect may be to assure providers that a bypass won’t drop below $100,000. Then, why would any hospital provide them for less when $100,000 is guaranteed?

In contrast, consider the Narayana hospitals in India. With no such guaranteed floor of payments, Narayana has pushed the costs of a bypass down to the $1,000-$2,000 range. And their success rates exceed those of American or other Western hospitals. Narayana’s hospital in the Cayman Islands does bypasses for just over $30,000.

America needs to rethink its priorities in health care. More centralized control — Medicare-style — won’t likely do what we imagine.