February 2001
Productivity and Health Care: Productivity in Health Care: The Value of Medical Technology

While cost-reducing technology has blossomed in other sectors of the economy, the health care arena remains untouched by these advances in efficiency. Research toward new technology usually aims to lessen expenses, although medical discoveries by research scientists can sometimes increase costs. For example, previously incurable diseases that were ignored as hopeless cases have become curable thanks to advances in medical technology. But that technology is expensive. As medical researchers discover and perfect these cures, the industry is prevented from maintaining low costs for patients that benefit from the treatments.

The increasing costs and improved technologies that distinguish the health care industry force policymakers to question whether the process of implementing new technologies operates at the most efficient level. One way to improve efficiency would involve having consumers pay for new technology and the resultant increases in health insurance premiums, which would cover the costs of new technology. Efficiency conflicts emerge when managed care insurers do not pay doctors high enough wages, which prompts doctors to lump all patients, even if some need the latest technology treatments, together as a group. Instead of attending to the needs of individuals, they save money by using the level of medical technology that would satisfy the average patient or insurance plan. These difficulties could be solved if more doctors established a strong relationship with a single insurer, which would discourage doctors from supporting multiple insurance plans in order to acquire money and would instead encourage them to focus on a single plan and its special rules for a variety of patients. An increase in incentives and a more competitive market structure in the health sector would address these problems by dissuading insurance monopolies from developing in the health care sector.

Recent improvements in health care technology have reduced heart attack mortality rates while simultaneously lowering the cost of care provided to heart patients. In addition, advances in cataract surgery allow doctors to offer the procedure at substantially lower costs than during the past half-century. Instead of being hospitalized for an extended period of time, cataract patients today leave the hospital in as little as twenty-four to forty-eight hours, thus incurring lower hospital bills for services rendered.

While these examples show that medical research to enhance hospital efficiency has improved, uncertainties linger about new methods in health care. For example, while progress has been made in reducing the number of fatal heart attacks, some researchers wonder whether these advances are due to improved technology or just incidental recovery on the part of the patient. In addition, areas like cancer research have not yielded results that lower costs and thus they require a more profound level of academic and medical attention.

The benefits of improved medical technology must be weighed against the resulting changes in cost. Recent research by the review panel of the Medicare Trustees’ Report found that medical costs have been increasing at a rate of 1 percent above increases in GDP. If we can somehow cause medical costs and GDP to grow at the same rate, we can keep health care costs from continuing to grow as a share of GDP. For the long term, we should base our decisions on how to allocate funding to the health sector by looking at what people need and are willing to pay for at the margin.

Statistics dating from 1987 to 1995 show that labor productivity in health care has continually declined a half percentage point each year. However, the statistics contain flaws because of the valuations placed on changes in the health care status of patients: Researchers examining changes in labor productivity must also consider deviations in inflation and quality of care. Placing a value on the improvement in care in comparison to the increase in price would make it possible to value productivity change.

Barriers exist that prevent analysts from fully evaluating and thus providing accurate information about the modern health industry. The paucity of data about the state of the health industry represents a major hindrance to the process of reforming medical technology. In an information age in which the federal government pays over half the costs for gathering information, it is inconceivable that policymakers still lack ample, reliable data about the health sector.

A successful free-market approach to health care has already been established in certain areas. The laser surgery market is an example of a medical free-market system that works because of its directly competitive nature, which spurs consistently lower prices, increased availability, and significantly modernized procedures. Since the laser surgery market is both sophisticated and price-efficient, it provides health officials with a good model to emulate. However most areas of health care, such as Medicare, which gives patients outdated technology at this year’s premium, continue to lag behind other industries in development. The inefficient, expensive, and obsolete state of the health care system is incompatible with the modernized, free-market society of today.

The obscurity that prevents us from accurately assessing developments in medical technology originates from the challenge of measuring productivity in health care. Placing a monetary value on aspects of health care, such as the time patients must spend in hospitals and a lower death rate for patients battling illnesses, is a more difficult way of measuring effectiveness. We should seek to understand our current situation in health care, and we must then develop a plan to modernize the health system to maximize productivity gains.