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ECONOMIC COSTS Questions have been raised about the relationship between medical technology, particularly equipment-embodied technology, and the cost of health care. Technology has been identified as a major cause of increasing health care expenditures, with the implica- tion that controlling new technology is required to contain health care costs. The committee believes that the full economic impact of changes in medical technology can be assessed only by compar- ing resulting changes in health care costs with net social bene- fits. Such benefits may be measured in terms of decreasing rates of mortality and morbidity and improving quality of life. Studies of the impact of different classes of medical technology on hospi- tal or health care expenditures alone ignore such benefits, but they do indicate the kinds of technology likely to increase costs (that is, to lead to increases in total per-capita health care outlays) and the need of demonstration of improved patient bene- fits. Consequently, the committee has assessed the evidence on the relationship between medical technology (particularly equipment-embodied technology) and health care expenditures, as well as the evidence relating these costs to the social benefits that may follow. CONCEPTS OF ECONOMIC COSTS The economic cost of new technology can be measured at three levels: â¢ Direct costs associated with the operation and use of tech- nology. These include the capital costs associated with the pur- chase or lease of equipment and the related facilities necessary l4
l5 to use the technology, as well as the direct costs of operating the equipment and facilities. Direct cost estimates are often made for a specific technology or class of technology in order to determine the burden on payers. An example is an estimate by Neuhauser and Jonsson that coronary bypass surgery, if performed on 700,000 patients annually, as predicted by some experts, could cost in excess of $5 billion per year. ' â¢ Indirect health care costs or savings. Pitted against the direct costs of operating a technology are the additional costs or savings (negative costs) resulting from changes or substitution in the delivery of other medical services. The costs of a length- ened hospital stay due to the use of a new procedure would be in this category. Similarly, savings from the substitution of a new technology for more costly technology that previously performed the same tasks would also be considered indirect. â¢ Social costs or benefits. The measurement of all costs as- sociated with a new technology, including direct and indirect health care costs, as well as costs accruing outside of the health care system, represents the highest level of measurement. In- creases in productivity, reduction in pain, improvement in the quality of life, and increases in life spans are benefits (or nega- tive costs), although assigning dollar values to such benefits is difficult. Changes in the risk of morbidity or mortality result- ing from new technology also need to be included in the social cost or benefit calculation. Research and development costs are not included here in the measurement of the economic costs of new technology for two rea- sons: (a) a large part of the research and development of equipment-embodied technology occurs in industrial settings, where, it is assumed, costs will be reflected in the price of the resulting equipment; and (b) it is virtually impossible to assign research and development costs funded by the government to particular classes of technology. THE DIRECT COSTS OF EQUIPMENT-EMBODIED TECHNOLOGY There is no question that the use of medical equipment in provid- ing health care services has increased dramatically over the past 5 years alone. Total domestic shipments of x-ray apparatus and electromedical devices increased from $444 million in l972 to an estimated $l.3 billion in l977, an annual growth rate of about 24 percent over the past 5 years.122 Predictions for l978 are that the industry will sell $l.6 billion of this sophisticated medical equipment, an increase of 20 percent over l977.122 Alone, this
l6 trend is not revealing, for the increase in equipment purchases could be substituting for expensive labor and might actually be moderating the rate of increase in health care expenditures. More analysis is needed to determine the total direct costs of all this equipment. Only one study has attempted to measure the direct contribu- tion of equipment-embodied technology to increases in health care costs. That study, by Cromwell et ai.,19 estimated the direct con- tribution of equipment to changes in the level of hospital costs in l5 Boston hospitals. In a l0-year period (l965-75), Cromwell and his colleagues found, total capital equipment expenditures in these hospitals rose by 23 percent, accounting for 9 percent of the total annual increase in hospital costs in the l0-year study period. Moreover, in a paper commissioned by this commit- tee, Warner extended the estimate by including the costs of com- plementary inputs associated with the operation of equipment and estimated that "on average the operating (variable) costs associ- ated with capital-embodied technologies at least equal, and prob- ably exceed by a factor of 2 or 3, the capital costs" (see Appendix G). Therefore, equipment may have accounted for l7 to 34 percent of the total increase in hospital costs in recent years. Warner pointed out the problem of using a sample of l5 Boston-area hospi- tals as a basis for a national estimate, especially because such hospitals have heavy teaching responsibilities and serve as re- gional referral centers. The estimate would therefore need to be revised downward. The rising equipment expenditures documented by Warner include not only the costs of new or updated technology, but also the costs of buying additional units of existing equipment in response to increased demand for hospital services and beds during the study period. Furthermore, some of the new or updated technology adopted by the hospitals during the study period may have replaced inputs in other categories (such as labor). Nevertheless, the estimates by Cromwell and Warner are the only reasonable attempts to measure the total direct costs of equipment-embodied technology. Much of the circumstantial evidence linking equipment-embodied technology to increased hospital and health care costs is based on recent studies of the increased input intensity in the provi- sion of health care services. In l972, Waldman133 estimated that increases in real inputs (labor and material) accounted for 50 per- cent of the annual changes in per diem hospital costs between l95l and l970. Similar findings by Worthington* 43 and, most recently, Feldstein and Taylor have demonstrated the changing nature of hospital services. Feldstein and Taylor found that about 75 per- cent of the rise in hospital costs relative to the general economy can be attributed to increases in labor and nonlabor inputs per
l7 patient day. Increasing intensity of care as measured by in- creasing inputs cannot be assumed to be synonymous with changes in technology. However, Waldman implies that it is, and more recent analystsâsuch as Cans and Cooper36âhave even labeled the increases in input intensity as the "technology factor." This label is misleading; as Warner has observed, "the only conclu- sions warranted by these data is a tautological restatement of what was calculated: half of hospital cost increases has been due to unit price increases; the other half represents increases in the quantities of inputs" (see Appendix G). Further evidence about the nature of the increasing intensity of services provided in the hospital has been offered by Redisch," who found that approximately 40 percent of the rise in hospital operating costs per admission results from increased use of nine ancillary services, most under the control of physicians. Such services include pathology tests, nuclear medicine procedures, anesthesiology, pharmacy items, lab tests, radiological proce- dures, therapeutic x-ray, and blood bank units. More than any other medical care services, these ancillary services are equipment- intensive. Of course, the increasing use of these types of ser- vices may be as much a function of increasing demand as it is a function of technological change in the services. Neither Redisch nor any other student of the problem has attempted to analyze the various causes of utilization increases. THE IMPACT OF MEDICAL TECHNOLOGY ON TOTAL HEALTH CARE COSTS Several studies have attempted to measure the total impact of medi- cal technology on health care expenditure increases using a resid- ual approach. These studies attempt to account for all other sources of health care expenditure increase, and the unexplained residual of changes over time is assumed to measure the effects of technological change. In a study of the impact of new technology on the costs of hos- n i pital care, Davis used data from approximately 200 nonprofit hospitals for the period l962-68. She found that when effects of demand and supply variables had been determined, 38 percent of the annual increase in hospital expenses per admission remained unaccounted for. This residual represented a 2 percent annual in- crease in hospital expenses per admission and was attributed to technological change. The residual in Davis's study cannot be assumed, however, to represent only the effects of technological change. Other gradual changes in behavior over time, which were not represented by ex- plicit variables in her model, could contribute to the residual increase in costs. Changing attitudes about hospital care and
l8 improved methods of ambulatory care are examples of other possible contributing factors. Davis suggests that at least the residual provides an upper limit for the effects of technological change. This is not the case/ however. Unknown factors affecting the re- sidual could decrease costs over time and thus mask some of the effects of technological change. The residual in her model could therefore underestimate cost increases precipitated by techno- logical change. Davis's approach is further limited in its applica- bility to this study in that it does not differentiate between the effects of equipment-embodied technology and those of other tech- nology. Several investigators have used the residual approach to esti- mate the impact of biomedical advances on total medical care costs. Mushkin et al.82 analyzed the total impact of biomedical research and technology on health expenditures between l930 and l975. Bio- medical research and technological change were estimated to cause annual reductions in total health expenditures of 0.5 percent. This compares favorably with a 20-year study by Fuchs, which found that technological change had a positive residual effect on total health care expenditures of 0.6 percent annually between l947 and l967. The difference in these two studies may be attributable to differences in the periods and in the factors examined. Again, the residual approach employed in these studies has some major limitations. These long-term longitudinal studies include the effects on the cost of medical care of the significant advances in the treatment of communicable diseases during the period under study. They also include the net effect of shifting disease pat- terns of the population. Thus, the relatively favorable outcome with respect to the role of technology and biomedical research over the entire study period obscures the effects of more recent changes in technology. Moreover, both Mushkin and Fuchs are concerned with technological change in its fullest sense; the impact of equipment-embodied technology cannot be separated from that of drugs, procedures, and other technology in these studies. Scitovsky and McCall109 have analyzed the changes in costs of medical care associated with selected illnesses. The net increase in the average cost of treatment of an episode of illness from l964 to l97l was calculated for eight conditionsâotitis media, forearm fracture, appendicitis, maternity care, cancer of the breast, pneu- monia, duodenal ulcer, and myocardial infarction. In almost every instance, there were both cost-raising and cost-saving changes in treatment. However, Scitovsky and McCall note that "the costs of treatment of conditions requiring hospitalization rose at a con- siderably faster rate than those of conditions treated on an ambu- latory basis." Among the factors leading to higher costs were shifts to more expensive drugs, increases in the number of lab- oratory tests per case, and more miscellaneous inpatient and
l9 output patient services. The most dramatic cost increases oc- curred in the treatment of myocardial infarction. Such changes were traced principally to the increasing use of intensive care units. Thus, treatment cost increases were found to arise pri- marily from a shift in the setting of care within the hospital from less specialized to more specialized units. Unfortunately, only a few conditions were studied, and trends detected in this small sample of conditions cannot be assumed representative of all con- ditions. Therefore, the results of the analysis cannot be used to identify net effects of technological change on total health care expenditures. THE SOCIAL BENEFITS AND COSTS OF NEW MEDICAL TECHNOLOGY While the application of benefit-cost analysis to health programs has a long history,68 the committee is aware of only one study that has attempted to measure the "social" costs of a broad class of technological advances. This study, conducted by the American College of Surgeons,4 estimated the net contribution of research in surgery to medical and social costs. Using the life-cycle earnings approach to valuing changes in morbidity and mortality, the study found that the most significant research contributions had resulted in a net saving of $2.8 billion for the year l970, an impressive saving on its face. However, the study deals only with selected successful surgical advances, and the results are therefore biased. The study methodology eliminated from consider- ation surgical advances that have been considered marginal and even dangerous to the health of patients. It is likely that had these advances been included in the study, their net social costs would have partially or totally offset the net social savings re- sulting from the successful advances studied. Study of the economics of equipment-embodied technology ulti- mately rests on analysis of specific procedures or equipment whose costs have been weighed against their benefits. Even in cases where the benefits are life-saving, as in renal dialysis, program costs can seem staggering from a social perspective. The costs of the End Stage Renal Disease Program have exceeded all expecta- tions.101 Computed tomographic (CT) scanning is frequently cited as a technology whose direct costs will far outweigh the indirect savings and social benefits that will derive, although this hypoth- esis is based largely on conjecture at this point.8 In a case study of gastric freezing (Appendix D), Fineberg has shown that direct costs for the purchase of the freezing equipment amounted to approximately $500,000 over a 2- to 4-year period. This, plus the fees for the surgery that used the new technology were largely wasted, because the procedure was found to be of dubious value to
20 patients. For additional instances, see Russell and Burke,105 who have shown large expenditures for uncertain, unproven, or disproved equipment technologies. But other case studies show savings that are attributable to the introduction of specific new equipment-embodied technology. In Appendix B of this report, Collen shows that net savings to the health care system would ac- crue from a yearly program of mammography screening for breast cancer among women aged 50 and over provided that each test could be performed at a cost of $l4 or less. Collen infers that phy- sicians, consumers, and third-party payers should consider this opportunity seriously. THE DISTRIBUTION OF COSTS AND BENEFITS OF NEW EQUIPMENT-EMBODIED TECHNOLOGY Who benefits from and who pays for changes in equipment-embodied technology? It is well known and to be expected that health care resources are disproportionately devoted to the seriously ill. For example, in l975, over 55 percent of spending for acute medi- cal services in the United States was on behalf of just 4 percent of the patient population. Intensive care and coronary care beds totaled 5 percent of all short-stay hospital beds in the United States in l975, but approximately l5 percent of hospital costs in that year were attributed to intensive care (Appendix G). More important than this concentration of resources per se is whether it has been intensifying over time. The evidence points to a slow but steady increase in the concentration of resources on those who are most seriously ill. Hospital care expenditures rep- resent an increasing proportion of total personal health care ex- penditures (up from 39 percent in l965 to 46 percent in l976 ), while patient days per thousand population have remained fairly constant. This trend is only partially accounted for by the aging of the population. Part of the increase must be attributed to changes in prices of hospital inputs and intensity of health ser- vices delivered in the hospital setting relative to those delivered in other settings. Trapnell and McFadden114 have studied the distribution of an- nual expenditures for insured health care services between l965 and l975 in a large group health insurance plan. They found that "there is a significant but small trend toward increasing con- centration of spending on those with the highest expenditures."* *The trend is probably understated because the spending analysis was based upon hospital charges, which do not accurately reflect the cost of providing individual services. It is often asserted that certain technology-intensive services such as special care units are subsidized by other hospital services. Hellinger53 has shown that charges are often manipulated to maximize hospital revenue from Medicare.
2l In a recent study of the benefits of critical care rendered in intensive care units (ICU's), Cullen et a2.20 found that 27 percent of the patients in a well-run unit survive only l year, resulting in a per-survivor cost of $52,000, and only l2 percent are restored to full function after l year. The per-survivor cost is calculated on the assumption that the ICU was a neces- sary condition for survival. If some patients would have sur- vived without the benefit of intensive care, the cost would have to be adjusted upward. Of course, the application of technology to serious and life-threatening problems provides a measure of hope to all patients, including those who do not survive. By increasing probabilities of survival (if only marginally), this equipment-embodied technology does provide some valuable benefits to all patients. The question reduces to one of willingness to pay for these benefits. According to Cullen, "Quite properly, those responsible for advancing medical frontiers do not consider the financial im- pact of providing increasingly costly, high quality intensive care on a large scale. Yet, economically, these costs are becoming in- tolerable and will be self-limiting in yet undetermined ways." CONCLUSIONS As purchases of capital equipment by hospitals have increased, the direct cost of hospital care also has risen. But no evidence exists to compare the increase in hospital costs with the savings to the health care system that come from the increased use of equip- ment or with the benefits to society. The evidence does show that this application of medical technology as a whole (including drugs and procedures as well as equipment) probably has not increased hospital or total health care costs substantially. But nothing can be said about the contribution of the equipment-embodied com- ponent of medical technology to total health care costs. In fact, costs of equipment-embodied technology could be offsetting savings from other technological advances, including new drugs, procedures, or methods for organizing health care delivery. There is evidence that hospital resources are increasingly con- centrated on the care of a smaller proportion of patientsâthose requiring critical or specialized care. Although critical care implies the intensive application of labor as well as equipment, it is obvious that critical care and specialized care units are equipment-intensive relative to unspecialized hospital beds. Today's increasing allocation of health care resources to the care of fewer patients is a trend whose ultimate benefits are largely unknown.
22 Health care financing policies have encouraged the increased emphasis on critical care medicine. The Health Insurance Insti- tute51 recently documented the rapid increase in dollar limita- tions on group health insurance plans. Today, about 80 percent of all group health insurance benefit packages include a total coverage limit of $l00,000 or more, while as recently as l97l fewer than l percent had such a limit. Consumers increasingly demand financial access to services for catastrophic illness even when those services appear to provide only marginal improvements in patient outcomes.