The costs of health care increased from $27 billion in 1960 to $900 billion in 1993. During this time, nominal spending (not adjusted for inflation) rose on average 11.2 percent a year. Four factors account for the increase. Population growth was responsible for about nine percent of the increase, while inflation in the general economy was responsible for an additional 42%. These factors are generally regarded as beyond the control of hospitals and other providers. Increases in the price of medical goods and services above the general rate of inflation were responsible for 25 percent of the growth, with the remaining portion of the increase due to increases in the utilization and intensity of services furnished. Medical price inflation and increases in service use together, therefore, were responsible for almost 50 percent of the growth. Both of these factors are potentially within the control of the health care industry.
Technology is a major contributor to both medical price inflation and increased utilization and intensity. While attention is frequently focused on the cost of new technology, the continued diffusion and utilization of existing technologies may be a more important contributor to cost escalation. An annual analysis done by the Prospective Payment Assessment Commission (ProPAC) has demonstrated that the added costs of quality of care enhancing new technology and scientific advances adds only about half of one percent each year to the cost furnishing inpatient hospital care to Medicare beneficiaries. In addition, many of the technologies included in this analysis are not entirely new, but have been available for a number of years. The utilization of these technologies, such as MRI, thrombolytic therapy, and
implantable defibrillators, continues to increase each year, adding to the
growth in spending. Other well established technologies, such as CAT scanning, diagnostic ultrasound, radiation therapy, and cardiac
catheterization, also continue to diffuse, with annual increases in utilization.
While some technologies, such as dialysers, have led to substantial improvements in productivity, many technologies do not appear to have contributed to efficiency increases. In some cases, new technology has allowed a simpler, less costly procedure to substitute for a more costly procedure. Examples include advances in cataract surgery, arthroscopy, and
laparoscopic cholecystectomy. In each of these cases, however, while the payment for each unit of service has decreased, the number of services furnished has increased, resulting in overall growth in spending.
Much attention has been focused on lowering costs of health care, including the title of this session. In fact, policy makers are not considering proposals to lower health care costs. Their goal is more modest: to allow the rate of increase in spending. Total health care spending has been growing at about four to five percent per capita above general inflation. Most health reform proposals, including the one proposed by President Clinton, would set a long-term spending growth target related to the growth in the gross domestic product (GDP). Such a target would allow real per capita spending to grow about 2 percent a year, rather than the current increase of four to five percent a year.
Such a target could be tough, but not impossible, to achieve. It is not clear, for example, why the costs of labor and many supplies in the health care sector should continue to grow at rates substantially faster than in the general economy. There is also evidence of substantial excess capacity in the supply of many technology-intensive services. It is likely that a more rational distribution of technologic capacity could result in economies of scale and cost savings. Since excess service capacity has been shown to stimulate additional demand for care, reducing excess capacity could also help control inappropriate utilization. Further, there is substantial research demonstrating that concentration and specialization in the delivery of some technology-intensive procedures is associated with spending reductions as well as improved quality of care.
Is there a conflict between improved health care delivery and controlling the growth in health care spending? Not necessarily. The most stringent health care reform proposals would decrease the rate of spending growth by two to three percent a year from historical levels. The key issue is how providers, physicians, and suppliers would respond to revenue constraints. The costs of labor and supplies can be held to levels in the general economy. Increased concentration of complex procedures can lower cost growth, while improving quality of care. Physicians and other providers can make good decisions regarding the allocation of limited resources, when given the incentives to do so, together with timely information on medical appropriateness. Concerns about the cost of technology, however, should not focus primarily on new advances. Technologies in their first few years of diffusion account for only a small share of spending increases, and undue attention to new advances could have deleterious effects on innovation. Instead, the focus should be on using existing technology more efficiently and productively and eliminating utilization that is of marginal or no value in improving quality of care.