Technology Growth and Expenditure Growth in Health Care

55 Pages Posted: 18 Apr 2011 Last revised: 1 May 2011

See all articles by Amitabh Chandra

Amitabh Chandra

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Jonathan S. Skinner

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2011

Abstract

In the United States, health care technology has contributed to rising survival rates, yet health care spending relative to GDP has also grown more rapidly than in any other country. We develop a model of patient demand and supplier behavior to explain these parallel trends in technology growth and cost growth. We show that health care productivity depends on the heterogeneity of treatment effects across patients, the shape of the health production function, and the cost structure of procedures such as MRIs with high fixed costs and low marginal costs. The model implies a typology of medical technology productivity: (I) highly cost-effective "home run" innovations with little chance of overuse, such as anti-retroviral therapy for HIV, (II) treatments highly effective for some but not for all (e.g. stents), and (III) "gray area" treatments with uncertain clinical value such as ICU days among chronically ill patients. Not surprisingly, countries adopting Category I and effective Category II treatments gain the greatest health improvements, while countries adopting ineffective Category II and Category III treatments experience the most rapid cost growth. Ultimately, economic and political resistance in the U.S. to ever-rising tax rates will likely slow cost growth, with uncertain effects on technology growth.

Suggested Citation

Chandra, Amitabh and Skinner, Jonathan S., Technology Growth and Expenditure Growth in Health Care (April 2011). NBER Working Paper No. w16953, Available at SSRN: https://ssrn.com/abstract=1810307

Amitabh Chandra (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

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National Bureau of Economic Research (NBER)

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IZA Institute of Labor Economics

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Jonathan S. Skinner

Dartmouth College - Department of Economics ( email )

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United States
603-646-2535 (Phone)

National Bureau of Economic Research (NBER) ( email )

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