Technological Innovation Has NOT Increased the Cost of Health Care

Today, reading a report of a recent RAND study, I came across a claim that I have seen at least a thousand times: “the cost of health care has increased rapidly, thanks largely to the pace of technological innovation.” This claim has been made so often that it has become almost a ritual incantation for those who comment on health-care costs. The claim, however, is completely false.

Suppose we inserted a different referent in the statement, claiming, for example, that “the cost of communcation services (or computing power or consumer electronic products) has increased rapidly, thanks largely to the pace of technological innovation.” No one would accept such a claim, because we all know that technological innovation has drastically reduced the cost of these goods. For the same price (adjusted for inflation) that I paid for a simple calculator in 1970, I can now purchase a computer with thousands of times more computational power, owing to technological progress during the past several decades.

Let’s be clear: technology refers to the knowledge used to transform resource inputs into product or service outputs. Technological progress means the acquisition of new knowledge that allows us to produce given outputs with fewer inputs or to produce entirely new outputs. Cost-reducing technological change, like any other source of cost reduction, has the effect of lowering prices in free, rivalrous markets.

Health-care markets, however, are anything but free, rivalrous markets. Instead, they are pervaded by countless government regulations, requirements, prohibitions, and other impediments to competition. A large share of the payments for health-care services is made by governments or by private payers whose own payment arrangements are constrained by tax rules and  other regulations. When new health-care technology is developed, potential users may not be allowed to adopt it as they wish or to buy and sell freely the services whose production it enhances.

Many of the medical procedures, tests, instruments, and so forth that are available today did not even exist a few years ago. When people avail themselves of these innovations, they are not obtaining the same service at greater expense; they are obtaining a different (presumably superior) service, whose price is not readily comparable to the price paid previously for another type of service. A CAT scan or an MRI is not an X-ray. The newer types of images may cost more, but they provide more information to the user. Many medicines now in use are new products, not readily comparable with (presumably less effective) medicines used previously.

Health-care costs rise rapidly in our system because of the raft of government interventions in the relevant industries, especially those that involve setting the terms of reimbursement for services provided to patients. Other things being equal, the effect of technological change has been, as it always is, to lessen the costs of providing health-care services. But other things have decidedly NOT remained equal, in part because the process of technological change itself has transformed the very nature of what is involved in “health care.”

Let’s not blame technological progress, which is generally a benign and often a marvelously beneficial thing, for the baneful effects of government interventions in health-care industries.