The problem is that costs continue to rise, and the ability of the public and private sectors to finance health care is being strained. American society is approaching, or may have reached, the point at which it is not possible to provide the best available health care to every American, regardless of cost. The de facto solution has been to restrict access to health care for a growing segment of the population—the uninsured—while preserving the myth of best available care for those fortunate enough to have coverage.

Upward pressures on health care costs will only increase in the 1990s. A growing array of new technologies will claim an increasingly large share of national resources. The birth cohort of 1945 to 1965, the “baby-boomers,” will move into the age range associated with increasing prevalence of chronic disease. Universal health insurance, in some form, may well be adopted. Any of these three forces will force hard choices, challenging the myth of “best available technology for all.” Medical technologies, especially new ones, will have to justify their costs in a climate of competing claims on resources.

This paper addresses four aspects of the relationship between new medical technology and costs. First, we review the evidence regarding the contribution of new technology to the aggregate cost of health care. Second, we review a normative model of optimal diffusion of technologies, based on evaluation of their cost effectiveness—that is, the ability of a technology to improve health outcomes. Third, we examine the influence of economic incentives that affect adoption of new technology in the U.S. health care system and contrast the resulting priorities with those derived from the normative cost-effectiveness model. We examine incentives for hospitals, fee-for-service physicians, and managed care organizations. We cite examples of incentives for underdiffusion of cost-effective technologies and overdiffusion of cost-ineffective ones. Finally, we comment on future policy options for achieving a more cost-effective pattern of technology diffusion.

HOW MUCH DOES NEW TECHNOLOGY ADD TO HEALTH CARE COSTS?

Researchers generally agree that medical technology has contributed to rising health care costs (1-3). Health insurance removes financial barriers to consumers, thus raising demand for technology and inducing providers to offer a more expensive mix of services. But researchers have struggled to measure how much technology has contributed to increasing costs. Part of the difficulty lies in defining medical technology. The term is commonly defined broadly to include drugs, devices, surgical procedures, and organizational support systems within which medical care is delivered (4). Identifying the changes in cost attributable to these items in any given period is virtually impossible. Even if the more important innovations could be listed, it would be extremely difficult to trace their overall economic impact.



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