Medical Technology and the Health Care System A Study of the Diffusion of Equipment-Embodied Technology (1979) / Chapter Skim
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APPENDIX G: THE COST OF CAPITAL-EMBODIED MEDICAL TECHNOLOGY
APPENDIX G: THE COST OF CAPITAL-EMBODIED MEDICAL TECHNOLOGY
Pages 270-302
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From page 270... ...
Carter administration's proposal to limit hospital cost increases represents a potentially significant initative. As noted below, some analysts believe that inflationary pressures are subsiding of their own accord (McMahon and Drake, l976)
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From page 271... ...
The thrust of the theoretical argument, developed in the next section of this paper, is that the environment in which technology adoption and use decisions are made is relatively unconstrained by conventional economic factors and, in fact, is conducive to the adoption and use of technology. The empirical evidence comes from analyses of the causes of hospital cost inflation and from numerous individual case studies, discussed later in this paper.
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From page 272... ...
While this principle is frequently acknowledged, separation of consideration of benefits and costs pervades the technology literature: Medical journals are replete with analyses of the diagnostic or therapeutic benefits of technologies, with little if any attention to costs, while the health economics literature emphasizes the costs of care and too often ignores the benefits. In the present context, the importance of this is that we need to distinguish cost increases that reflect improvements in care from those that are purely inflationary, i.e., higher prices for the same care.
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, a role which has been acknowledged legislatively at the federal level recently with the passage of the Medical Devices Amendments of l976 (U.S. Congress, l976)
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Understanding this environment helps to explain the concern about the excessive use of technology in medicine and the resultant costs, and it places the cost-of-technology issue in perspective as a factor in overall medical cost inflation. This section reviews both noneconomic and economic factors affecting the adoption and use of medical technology.
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From page 275... ...
It is commonly asserted that administrators acquire sophisticated capital equipment and facilities in order to attract and hold high caliber physicians on their staffs (e.g., Davis, l972; Muller and Worthington, l970)
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This research has contributed both directly and indirectly to the pool of medical technology. Governmental involvement in the medical technology arena can promote the development and diffusion of capital equipment, as does its support of research, but it can also restrict equipment production and use, principally through regulatory policies.
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. With the possible exception of the regulatory mechanisms, the above forces combine to produce a noneconomic environment that is favorably disposed to the adoption and use of modern, sophisticated technology.
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In addition, increases in real income over the period mean that patients must now work fewer hours to pay the direct cost of a day of hospital care (Feldstein and Taylor, l977)
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. The unusual financing relationships that define an economic transaction in medicine have been the subject of many studies, though relatively few have focused on the area of expensive capital equipment, where the potential impact seems especially great.
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III. DEFINITIONS AND CONCEPTS In order to discuss the allocation of medical costs to capitalembodied technologies, we must define terms more precisely.
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The Cost of Capital-Embodied Medical Technology The first and most sensational cost of much medical technology is the capital cost. However, it is generally agreed, and empirical evidence demonstrates, that the most significant costs of major capital equipment derive from the ancillary personnel and supplies needed to use the equipment (e.g., Abt, l975; Ginsburg, l976)
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From page 282... ...
This question is central to identifying the direct costs of medical capital-embodied technology. As is discussed below, narrowly construed, capitalembodied technology probably does not impose a sizable cost burden on the medical care system; broadly construed -- that is, to include all services and procedures that have a significant link with the use of capital or with another procedure dependent on capital -- such technology is probably enormously expensive.
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From page 283... ...
Technology's Costs and Its Contribution to Cost Inflation A final distinction is between the costs associated with the stock of capital equipment -- e.g., the equipment in use during l977 -- and changes over time in the costs of medical care resulting from additions to and changes in the nature of the stock of equipment. An understanding of this distinction and separate measurement of these different costs are essential to sound policymaking.
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IV. ALLOCATING MEDICAL CARE COSTS TO CAPITAL-EMBODIED TECHNOLOGY The preceding section discussed both conceptual approaches to and problems in allocating medical costs to capital-embodied technology.
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From page 285... ...
Rather than attempting to specify the precise production functions, the analyst applies a multiplier to the capital costs, where the multiplier is derived from case studies of the first type. That is, suppose that examination of numerous case studies of individual capitalembodied technologies suggests that the average ratio of total costs to the capital costs alone equals 3.
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From page 286... ...
. equipment constitutes an important source of hospital cost inflation, it must be because of the complementary inputs required to operate and service it, for total equipment purchases amount to less than five percent of hospital costs on the average" (Abt, l975, p.
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With ICU and CCU beds totaling 5 percent of all short-stay hospital beds in l975, approximately l5 percent of l975 hospital costs can be attributed to intensive care. Two-thirds of that total represents an excess over what would have been necessary to maintain the same number of ward beds.
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. If operations are included in the category of capitalembodied technology (due to the capital equipment in operating rooms)
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. In one of the few studies to systematically examine the costs associated with several major pieces of hospital capital equipment,25 Abt Associates concluded that it is the capital's complementary inputs, such as labor and supplies, which contribute most significantly to hospital cost inflation.
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Proxy Measures in Studies of Hospital Cost Inflation Employing a variety of proxies for technology, scholars who have studied hospital cost inflation attribute anywhere from 30 to 50 percent of that inflation to technology. It should be noted at the outset of this discussion that there is much confusion in the interpretation of the findings by proxy, and, while 50 percent would seem to provide a high upper bound, the true contribution of technology to inflation, particularly high-cost technology, may be less than the "low" estimate of 30 percent; clearly the contribution of expensive capital-embodied technology must be less than the total effect of technology.
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From page 291... ...
However, given the context of the word "technology" in this paper and in most current discussions on the topic, the 50 percent residual in cost inflation after controlling for unit prices should not be labeled the "technology factor." 27While Redisch's regressions do indicate that growth in these services was a significant factor, his attribution of all the explained variance to the service variables is unwarranted. His equations also include highly significant time dummy variables.
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From page 292... ...
costs associated with capitalembodied technologies at least equal and probably exceed the capital cost by a factor of 2, 3, or more. Using as a base Abt's estimate of the direct contribution of high-cost equipment expenditures to hospital cost inflation (8.58 percent)
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While it is no more than an educated guess, I would therefore place the contribution of expensive capital-embodied technology to hospital cost inflation at less than a quarter, quite possibly considerably less. In any event, the procedure for estimating the contribution seems reasonable.
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From page 294... ...
The perception of the need for a unified policy reflects either a belief that there is something fundamental that distinguishes capital-embodied technology from other facets of care, or else a frustrated acceptance of the inevitability of an incrementalist approach to contolling the system, combined with a belief that capital equipment is responsible for considerable medical cost inflation. As Wagner and Zubkoff observe (forthcoming, p.
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, run from l to 3 or more times capital costs. • Adoption and use of capital-embodied technology is probably a significant though not primary cause of hospital cost inflation.
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. With 90 percent of all direct hospital costs covered by insurance, it is probably correct that the economic pressure for increasing the quantity of services will be small.
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l974. "A Study of Hospital Cost Inflation." Journal of Human Resources 9(l)
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l97la. "Hospital Cost Inflation: A Study of Nonprofit Price Dynamics." American Economic Review 6l(5)
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l970. "Hospital Cost Functions." American Economic Review 50(3)
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l976. "Third Party Reimbursement and the Evaluation of Leasing Alternatives'." Chapter 5 in "Financial Management Under Third Party Reimbursement." K
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l972. "A Microeconometric Study of Hospital Cost Inflation." Journal of Political Economy 80(6)
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l972. "The Effect of Changing Technology on Hospital Costs." Research and Statistics Note, Social Security Administration, Office of Research and Statistics.
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