Adopting New Medical Technology (1994) / Chapter Skim
Currently Skimming:
2. THE NATURE OF TECHNOLOGICAL CHANGE: INCENTIVES MATTER!
2. THE NATURE OF TECHNOLOGICAL CHANGE: INCENTIVES MATTER!
Pages 8-48
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 8... ...
Probably not! When life itself is at stake, society finds it excruciatingly difficult to withhold access to effective new technologies even when they are extremely costly, as is the case with organ transplants and mechanisms for sustaining life for very low birthweight babies.
|
From page 9... ...
Those incentives will determine whether the new technologies drive health care costs upward or downward. Incentives matter!
|
From page 10... ...
By 1980, 82.5 percent of the U.S. population had some health care insurance, compared with fewer than 10 percent in 1940.2 2 Throughout the postwar period the expansion of private health care insurance has been spurred by federal tax policy.
|
From page 11... ...
long-run growth of health care expenditures is a by-product of the interaction of the R&D process with the health care insurance system.4 I also examine briefly some effects of alternative forms of health care insurance on the quality of care, as distinguished from its quantity, 3 Other effects of health insurance, particularly on incentives for utilization of health services, have received considerable attention. For a recent and valuable review, see Pauly (1986)
|
From page 12... ...
Whatever term is used, the point is to distinguish private, profit-oriented organizations from the institutions of either government or the private nonprofit sector. To be sure, government and private nonprofit organizations operate in "markets," in the sense that exchange occurs.
|
From page 13... ...
The subsequent sections focus on the effects of R&D (technological change) on the health care insurance system, the reciprocal effects of the insurance system on the R&D sector, and the effects of alternative insurance systems on quality of care, with the state of technology fixed.
|
From page 14... ...
Bureau of the Census, 1987, tables 1, 2, and 137~. Initially, most health insurance was of one particular type-covering a limited menu of only hospital services, perhaps after a small deductible and paying ("reimbursing")
|
From page 15... ...
An expanding health care insurance system more widespread coverage of people and broader coverage of health care resources such as pharmaceuticals and chiropractic services- might also account for the growth of health care expenditures, but this explanation would pose the question of why insurance coverage would be expanding.l° The major theme of this chapter is that the demand for health care insurance and the process of technological change are interdependent. A shift away from insurance that paid hospitals and physicians on the basis of endogenously deter 9 I owe this point to an anonymous reviewer.
|
From page 16... ...
presents a model in which retrospective pricing of hospital services and physician services (through fee-forservice payments to physicians on the basis of "usual and customary" fees) is allocatively efficient when there is little insurance coverage and health care prices are determined in relatively competitive markets, but diminishes as that coverage spreads.
|
From page 17... ...
The effect of health care insurance on incentives for R&D depends on the operational definition of health care that is, on the boundaries of the insurance contract. Health insurance contracts do not offer the option of coverage only for particular subsets of technologies, such as those already available at a given point in time (Goddeeris, 1984b; Goddeeris and Weisbrod, 1985; Baumgardner, 1989~.
|
From page 18... ...
The hypothesis that the definition of health care is endogenous to the economic-political system in which health care insurance is defined, provided, and financed has important implications, to the extent that it is valid. If insurance coverage is defined, as it has been, to encompass new technologies regardless of the costs involved and to encompass an ever-widening concept of health care that is, itself, responsive to the development of new technologies, the R&D sector will continue to face incentives that reward costly new measures relative to costreducing innovations.
|
From page 19... ...
EFFECTS OF RESEARCH AND DEVELOPMENT (TECHNOLOGICAL CHANGE) ON THE HEALTH CARE INSURANCE SYSTEM Advances in medical technology involving both diagnostics and treatment have been, at least arguably, a driving force behind the rapid growth of health care expenditures (Altman and Blendon, 1979; LaCronique and Sandier, 1981; Showstack et al., 1982; Aaron and Schwartz, 1984; Wilensky, 1987~.
|
From page 20... ...
A new technology that increases the cost of treating a particular disease but that is successful in increasing life expectancy sufficiently to decrease expected health care costs per year of life could diminish the demand for health care insurance; my conjecture is that it would not, but this deserves more attention.l6 The point is that technological change need not increase demand for insurance, even if the change increases the expected cost of treating a particular illness. It could take forms that decrease either the aggregate expected health care cost for all illnesses or the variance.
|
From page 21... ...
Conditional on contracting liver disease, however, the person would spend a great deal more on treatment once the new technology became available. As a result, the development of transplant technology increased private demand for health care insurance, ceteris paribus.
|
From page 22... ...
If, however, one thinks of a dynamic process, in which knowledge tends to grow from the first of the three levels to the second and then the third, the cost function associated with any particular disease might be an inverted U shape, it is plausible, although certainly not verified, that health care costs are highest for the halfway technologies. In the extreme case of a nontechnology, when the knowledge base is so weak that there is nothing useful to be done, costs are likely to be low, as they are when the high-technology state of knowledge is reached.
|
From page 23... ...
With the demand for insurance being a function of uncertainty of loss, demand should tend to increase most rapidly when changes in technology are of the expenditure-increasing, halfway type. Costly new surgical techniques such as organ transplants and the use of artificial body parts spur the demand for insurance; low-cost vaccines diminish it.23 Why has there been relatively more development of technologies like organ transplantation than like the polio vaccines?
|
From page 24... ...
The process of developing new medical technologies involves years of planning and research and, when drugs and medical devices are involved, more years of clinical trials to obtain approval by the Food and Drug Administration; in the case of pharmaceuticals, a period lasting 12-15 years is typical between the initiation of a research process and the marketability of a drug. As a result of this lengthy process, the R&D process depends on forecasts of the health insurance system, for the form of expected insurance coverage will determine the strength of the market for new products.
|
From page 25... ...
identifies three types of insurance, the third being "indemnity." This type, however, is a special case of prospective coverage in the sense that the insurer pays a fixed amount, conditional on a loss, but independent of the magnitude of the health care costs actually incurred. The indemnity might take the form of a fixed dollar payment for the loss of a limb or for a given illness.
|
From page 26... ...
with an exogenously determined set of prices, one for each of 468 diagnoses made at the time of admission.26 No longer is gross revenue for treating a particular patient a function of the hospital's decisions on use of resources. Financial incentives for hospitals under such a prospective payment arrangement differ diametrically from the incentives under a retrospective payment arrangement.
|
From page 27... ...
This led to substantial savings in professional labor costs, which are a major cost component (Rettig, 1980~. The shift to a prospective payment system (PPS)
|
From page 28... ...
Congress, 1985~. The effect of prospective payment insurance on R&D is illustrated by experience in the late 1980s with the cochlear implant for hearing-impaired individuals; scientif~cally promising research was discontinued as a consequence of its expected unprofitability, which resulted from application of the DRG pricing system.
|
From page 29... ...
Surgical advances can be cost-reducing, especially when they substitute for other halfway technologies; angioplasty, for example, substitutes for more costly coronary bypass graft surgery, and kidney transplantation substitutes for years of dialysis. When surgical advances substitute, however, for nontreatment, they are likely to increase the cost of treating the specific illness; since life expectancy may increase, though, the effect on mean annual health care costs per capita is less clear.
|
From page 30... ...
It also affects the incentive to search for methods to treat the ill rather than to prevent their illnesses.30 In general, health insurance has primarily covered treatment in hospitals, with preventive measures having quite 30 In the long run, the price of private health insurance depends on the state of the technology. Even so, risk-spreading over all the insured may make it privately profitable for the R&D sector to develop technologies for which the value (willingness to pay)
|
From page 31... ...
Figure 2-1 shows that the state of technology, which determines what is possible for the health care system to do, interacts with the health care insurance system, which determines the prices and other incentives that providers and consumers confront, to determine the level of health care expenditures. Figure 2-2 portrays the interaction between the scientific knowledge base and the incentive structure that operates through the health insurance system to affect "tomorrow's" technological base.
|
From page 32... ...
Science Base Health Care Insurance System ~Technology FIGURE 2-2 The health care insurance system establishes incentives for the R&D sector. Health Care Insurance System - I Technology FIGURE 2-3 The technical capability for delivering health care affects the form and coverage of the health care insurance system.
|
From page 33... ...
lures without altering other variables and, ultimately, without affecting out comes of the system in perhaps quite unexpected ways. EFFECTS OF INSURANCE ON CHOICE OF TECHNOLOGY AND QUALITY OF HEALTH CARE IN THE SHORT RUN, WITH TECHNOLOGY GIVEN In addition to its potential to influence R&D, the health insurance incentive structure also influences the deployment of existing medical technology, with implications for quality and access to care.
|
From page 34... ...
Price will be a poor gauge of overall quality. A prospective payment reward structure such as a DRG system is a price control mechanism.
|
From page 35... ...
not with the actual clinical practices that is, how carefully surgery is performed (a type II attribute) (Lohr et al., 1988~.37 I remarked earlier that under a prospective payment system, financial incentives are to cut costs, provided quality does not suffer "too much."38 There are consequences, of course, of cutting quality, and they constrain health care providers: tort law liability for medical malpractice, loss of patients to competitors (Hirschman, 1970)
|
From page 36... ...
The expanding system of retrospective-pay health insurance that covered all "reasonable" hospital costs spurred both the development and the adoption of disposable items along with any other technology that was arguably quality enhancing. Today, with the shift to prospective pricing, sterilization and reuse is returning.
|
From page 37... ...
In particular, there should be attention to the tendency of a prospective payment insurance pricing system to cause input substitutions that overvalue reductions in easily observed expenditures and undervalue attention to reductions in quality that are more costly to observe. The response of the health care sector to financial incentives may not be the same for its various institutional elements private enterprise, government, and private nonprofit.
|
From page 38... ...
, as have venous constraints on the distribution of profit44 and access to public subsidies and private donations of money and time (lIansmann, 1980; RoseAckerman, 1982; Easley and O'Hara, 1983; Holtmann, 1983; Clotfelter, 1985; Steinberg, 1986; Weisbrod and Dominguez, 1986~.45 DRG pricing provides the same financial incentive for all hospitals to discharge patients earlier than would a retrospective pricing system, but because of differences in objective functions and constraints, the behavioral responses may differ among institutional forms. There have been studies, for example, of the effect of prospective payment on the condition, at discharge, of elderly patients with hip fractures (Palmer et al., 1989; Fitzgerald et al., 1988)
|
From page 39... ...
At the same time, expanding insurance coverage, which includes more people as well as a growing array of health care inputs, has provided an increased incentive to the R&D sector to develop new technologies and a growing incentive for subsets of consumers, who could benefit from particular new technologies, to 47 In a related study of rapidity of introduction of new technologies in HMOs relative to fee-forservice providers, the RAND Corporation health insurance experiment found an apparently slower rate of introduction in HMOs (Newhouse et al., 1985)
|
From page 40... ...
As an example of the potential effect of insurance on incentives facing the R&D sector, consider another major area of public policy and expenditure education. Unlike health care, which has been financed for decades by a retrospective, cost-based finance system, elementary and secondary education has been financed traditionally through what amounts to a prospective payment system; roughly speaking, state and local governments have given the schools a fixed grant per child.
|
From page 41... ...
The ideas presented above are a mixture of solid knowledge, soft knowledge, and hypotheses requiring testing. In order to expand knowledge about health care and provide financial access to it, society needs to understand more fully the dynamic process through which the health insurance sector, private and public, interacts with the R&D sector.
|
From page 42... ...
1987. Tax policy toward health insurance and the demand for medical services.
|
From page 43... ...
1974. "Tax Subsidies of Private Health Insurance" in The Economics of Federal Subsidy Programs.
|
From page 44... ...
1987. Health insurance and the demand for medical care: Evidence from a randomized experiment.
|
From page 45... ...
1976. National health insurance: Some costs and effects of mandated employee coverage.
|
From page 46... ...
1986. Taxation, health insurance, and market failure in the medical economy.
|
From page 47... ...
1985. Medicare's Prospective Payment System: Strategies for Evaluating Cost, Quality, and Medical Technology.
|
From page 48... ...
Journal of Health Economics 3~31:223-237. Young,D.
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.