Technology Growth and Expenditure Growth in U.S. Health Care Amitabh Chandra Kennedy School of Government, Harvard University Jonathan Skinner Department of Economics, Dartmouth College The Dartmouth Institute for Health Policy & Clinical Practice Funding from the National Institute on Aging and the Robert Wood Johnson Foundation

A Typical Working Day at Dartmouth

Journal of Economic Literature, June 1991

Source: CBO

Hall and Jones (QJE 2007): Health Care Spending Should Rise Over Time

Health Care Expenditures as a Fraction of GDP: Selected Countries

Growth in Health Care Costs (as % of GDP), Selected Countries:

Variations in Regional Growth Rates… Fisher, EF, J Bynum, JS Skinner, New Engl J Med, 2009.

Stent Rates by Province, Source: Therese Stukel, ISIS. Per 100,000 age 20+. Age/sex adjusted Except QC which is to 2004

The Supply Side: What Do Health Care Providers Maximize? Health care providers maximize the perceived health of their patients given financial constraints or incentives, but may be constrained by resource capacity, ethical judgments, and patient demand

The Physician’s Optimization Problem Saving Lives: Good for Society Physician income Capacity constraint Patient must be better off Which implies….

Dynamics of the model

Productivity Change Health Gains minus Costs

Dynamics of the model Productivity Change Cost-effectiveness of the kth input

Three Categories of Health Care Treatments 1.The diffusion of highly productive innovations

Highly Cost-Effective: Aspirin Post-MI Source: Swartz, MN, NEJM Oct 28, 2004

More Expensive, But Still Valuable

Cost-Effective Treatment (-s” Large in Magnitude) x Dollar value of treatment (at $100K per life year) x* Cost per patient

Average Productivity is High Too x Dollar value of treatment (at $100K per life year) x* Cost per patient Total Cost

Three Categories of Health Care Treatments 1.The diffusion of highly productive innovations 2.Potentially cost-effective but with heterogeneous benefits across patients

PCI (Angioplasty and Stents)

For Some, Highly Cost-Effective Primary PCI Stable Angina Value of Quality-Adjusted Life Years ($100K/yr) # Patients Occusion post MI/ no angina Ψ s’(x) Cost per PCI

Average Productivity of Stents: Less Impressive! Value of Quality-Adjusted Life Years ($100K/yr) # Patients Ψ s’(x) Cost per PCI Total Cost X’

Three Categories of Health Care Treatments 1.The diffusion of highly productive innovations 2.Potentially cost-effective but with heterogeneous benefits across patients 3.Technologies with uncertain or low benefits

Rewards in This World for CT Scan Volume

Percent of Deaths Associated with ICU Stays and Medicare Expenditures Corr. Coeff =.80

How to Think About Health Care Cost and Aggregate Productivity Growth Improved Health Increased Costs Category I (Cost-Effective) Category II (Heterogeneous) Category III (Unknown or small)

Hypothetical Provider-Specific Measures of Quality & Spending Is it a positive or negative correlation? Spending Survival/Quality

Do We See This Pattern in Comparing Country Growth Rates?

Health Care Costs in the U.S. Growing Relatively Faster Source: Garber and Skinner, JEP, 2008

But Survival Gains in the U.S. Falling Behind Source: Garber and Skinner, JEP 2008

Weisbrod’s Prediction: Too Soon? Thus, under a prospective payment finance mechanism, the health care delivery system sends a vastly different signal to R & D sector, with priorities the reverse of those under retrospective payment. The new signal is as follows: Develop new technologies that reduce costs, provided that quality does not suffer “too much.” (p. 537, italics in text.)

Can U.S. Health Care Reform Work? Hospital/physician networks Rewarded for providing high-quality low-cost care Key component – incentives to adapt cost-saving technologies that reduce fragmentation and poorly coordinated care Health Affairs, 2009

Summing Up Enormous degree of heterogeneity in cost-effectiveness of health care Big potential for cost-saving technologies – in all countries! Rising taxes – ultimate brake on health care spending

U.S. Ireland Sweden Denmark Portugal Canada France Health Care Growth: Limited by Tax Burden Tax/GDP (1985) and Change in Health Expenditures ρ 2 = -0.47