Is health care becoming cheaper over time?
In yesterday's research desk thread, dt4211 asked:
How much of the cost growth in medical care (if any) is driven by increases in costs for the same services, and how much is the costs associated with new treatments and services that didn't used to exist? To put it another way, is there an increase in doctor productivity, such that the same output becomes cheaper over time?
That's an interesting question, and one I didn't know the answer to. So I wrote to David Cutler, a health economist at Harvard, and asked him. Here's his reply:
This is a simple question with a lengthy answer. A few points:
1. Most (>50%) of cost increases historically are driven by new services and expanded use of existing services. Not all of that is bad; most of my research is about the positive benefits of technological change (see my book, Your Money or Your Life). Put another way, productivity is improving.
2. That said, we spend much more than we need to -- my guess is 40 to 50% more than is needed to get the outcomes we get. Some care is wasted, and there are a ton of administrative inefficiencies (not just insurance, but everywhere). That's why when I talk about reform, I talk about spending the next 20-30 years eliminating waste, not cutting back on valuable services. At that point, we'll see how much we spend and what we need to do about it.
3. In very recent years (e.g., the past decade), I think price increases have mattered more. Most big cities have had a huge consolidation of providers, which has led to higher prices for care. This is true for hospitals and MDs. I think this is underappreciated by most of my profession. This is a pure transfer.
4. It's interesting that technology has been so one-sided. E.g., there is no Sam Walton of health care (though perhaps Tommy Frist Jr. counts) -- someone who revolutionizes health care by making it possible to get more for less. I think that's possible and just wrote an NBER paper on "Where Are the Health Care Entrepreneurs?" The key, in my view, is better information and payment reform. I'm quite taken by this question. I hope the next decade is spent producing billionaires able to give us better health for less.
June 22, 2010; 10:05 AM ET
Categories: Health Economics
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