Medical
Innovation: Promises & Pitfalls
Innovation and Health Care Spending
Innovations can reduce spending on medical care, but most do not. One government agency attributes nearly all of the age- and price-adjusted growth in per capita medical spending in recent decades to technological
Innovation.
The Interaction of Research and Health Care Finance
Federal support of biomedical research (more than $20 billion in fiscal year 2001 for the National Institutes of Health alone) and research investments by manufacturers and other private
companies (billions more) stimulate the development of new technologies and approaches to health care, each of which has consequences for health expenditures and outcomes.
U.S. health insurers directly invest little in biomedical research. But they have a powerful indirect effect on research investment because health insurance influences demand for and revenues from medical innovations. Because insured consumers pay only a fraction of the price of care, price is less important to them than are other characteristics of care, such as convenience, safety, and efficacy—that is, quality. Health insurance increases demand for health care generally, but its most important effect on health care spending may be through its long-term influence on the development of new forms of care. And health-insurance subsidized demand not only raises investment in medical research, but also changes the character of that investment, encouraging research on quality-improving innovations, rather than on cost-reducing ways to accomplish the same health outcomes as older interventions.
The quality-adjusted price of automobiles might fall, but because only high-quality cars would be sold, the average price of a car would rise. The costs of car insurance would rise inexorably. There can be little doubt that high spending on health care has encouraged technological innovation that has dramatically improved the well-being of Americans. Most people with health insurance in the United States are surely better off with today's health care at today's prices than they would be if they had 1980 health care at 1980 prices. The appropriate question is whether Americans would be better off today with the medical technologies and health care system that would have resulted if the demand for medical care had been more strongly influenced by price and if biomedical research had been shaped by such a payment system.
Averages versus Margins
Debates about technological progress in health care often confuse two distinct issues. Most proposals for the reform of health care financing and delivery would alter spending and incentives at the margin.
A Dilemma: Making Innovation Affordable Slows Innovation
In the U.S. health care market, government regulation is pervasive, insurance subsidizes consumption, and producers enjoy monopoly power through patents or proprietary information. The goals of health care policy—to provide coverage for the currently uninsured, to hold down health care costs, and to promote innovation—are frequently in conflict.
The desirability of government intervention in the health care market is widely accepted. Market exclusivity, maintained under government-granted patents or proprietary information, enables companies to charge higher prices, which make it possible for them to pay for research out of profits. Sometimes recovering research and development costs requires companies to engage in price discrimination, the practice of setting prices for different buyers according to their willingness to pay. Prices for drugs and medical devices, supported by subsidized demand, may bear little relation to the (often low) cost of production. Since well-insured patients can pay a great deal, the interaction between insurance and patents on drugs and devices enables companies to make large profitssuccessful products.
Recent increases in prescription drug spending and the rise of insurance copayments for drugs are both certain to make demand more sensitive to price. People with health insurance will pay a greater share of medication costs out-of-pocket, and the uninsured will pay the entire cost out-of-pocket. Health plans and pharmaceutical benefits managers are also likely to try to hold down price by negotiating price discounts from drug companies in return for policies that favor the products of those companies.
Medicine has a long and generally honorable history of price discrimination. Doctors have provided free or heavily discounted care to the needy, and drug companies have charged lower prices to those less able to pay full price. As the number of health care have-nots grows, the pressure for comprehensive health care reform may increase.
Ensuring Effectiveness of Care
Eliminating ineffective care, according to some policy advocates, is key to reducing health expenditures. Yet even if ineffective care is readily eliminated, the continued introduction of effective new forms of medical care will guarantee continued growth in spending. The chief problems facing the U.S. health care system today are setting priorities for choosing among effective forms of care and finding the means to pay for such care. There is a compelling need for a large, independent agency to carry out technology assessment in health care.
The Challenges Ahead
Even with improved information about new technologies, the combination of medical innovation and the aging of the baby boomers will almost surely lead to further increases in health care spending. In the coming decade people will pay a larger share of health care bills in the form of higher insurance premiums and especially more out-of-pocket payments.
Furthermore, access to medical care must be balanced against other societal needs including support for the poor, education, housing, and public safety.
We face a world of medical opportunity and challenge.