Arnold Kling

Health Care Spending

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Business Week's Howard Gleckman successfully distinguishes between health care cost and health care spending.


Medical technology is no different than consumer electronics. When DVD players cost $500, few people bought them, so total spending on the devices was insignificant. Now that they cost $50, everyone is buying. As unit costs fall, total spending rises. Same thing with health-care technology. As it gets less expensive, more and more people avail themselves of it.

As cost falls, spending rises. That suggests that demand is elastic.

For Discussion. Politicians might confuse spending increases with cost increases, and therefore call for cost controls. What effect would cost controls have under the circumstances that Gleckman describes?


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TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/28
The author at Deinonychus antirrhopus in a related article titled Universal Health Care writes:
    On the radio this morning two radio talk show hosts were talking to George Stephanopolous (hope I spelled that right). [Tracked on October 23, 2003 2:13 PM]
COMMENTS (7 to date)
Eric Krieg writes:

Great article there! It is about time that the impact of technology on health care costs is recognized by everyone, especially politicians.

Where we need to be careful is in using technology frivolously. For example, getting extra tests to ward off lawsuits.

Tort reform would do more to lower health care costs than anything else a politician could possibly do.

Steve writes:

That is a nice assertion about medical technology being like all other consumer electronics, however I am skeptical. When you are dying a $500 DVD player wont do diddle for you. However, a $500,000 procedure/treatment that might save your life...cost be damned. And since we live in a society where hospitals don't wheel patients out into the street to die on the gurney, I think there is a bit of difference. Basically the elasticity between the two is going to quite different, IMO. In other words, Gleckman is going to need more than some nice rhetoric to convince me of his assertion...like say maybe some data.

As for you discussion, if you mean that politicians will lower the cost from $500 for a treatment/procedure to $50 then the demand will increase, but if costs are still near the $500 range supply will not be sufficient, and you'll have excess demand, or a shortage. Long lines, longer waits, and possible even less medical care/technology. But, what the Hell...costs (i.e., accounting costs) will be down.

Politicians, in my opinion, don't care as much about opportunity costs as accounting costs until it could cost them an election. Even then, their response wont be to increase prices, but some other solution that is less direct such as raising taxes, borrowing money, imposing regulations.

Eric Krieg writes:

>>if you mean that politicians will lower the cost from $500 for a treatment/procedure to $50 then the demand will increase, but if costs are still near the $500 range supply will not be sufficient, and you'll have excess demand, or a shortage.

Can you say "Canadian Healthcare".

Americans may be getting their drugs up there, but the Canadians are coming here for MRIs. The Canadians limit technology use to lower costs.

Lawrance George Lux writes:

First, Gluckman presented an excellent article on the Issue. We are trapped in a increased health need spiral, as American society ages.

The basic tone of the article does not excuse Health care costs. Health care costs are still excessively high, due to a number of factors. Antiquated medical law still insists on a MD degree for many services, where that advanced level of training is unnecessary. The AMA still exerts high pressure to limit Medical School enrollment, in order to maintain high Doctor income. Drug companies still use patent rights to overprice their Product; I buy Prilosec OTC for $.70 per pill, instead of patent-protected $3.75 per pill previously. An equiped Hospital room can be provided for $80 per day, but the average price is $480; all in order to buy expensive equipment paid by all Patients in the hospital, though the Profits from such equipment can average $4000 per day. Gluckman's article cannot be used to excuse the current price-gouging in health care. lgl

Eric Krieg writes:

lgl, good comment about the stranglehold that the AMA has on medical schools.

The engineering societies don't have control over how many engineers graduate. I fail to see why the AMA should have this power.

BottomFeeder writes:

Quite frankly, Gleckman's assertion is just plain silly.

In the case of DVD players and their falling prices, every Joe SixPack in the world unilaterally decides if/when he chooses to purchase at current prices.

Health care is not even remotely similar as, with very rare exception, it's a physician who decides which health care procedures Joe SixPack will need to consume. Example.....gall bladder removal.

Ten yr ago, all gall bladder removal was major surgery. It required a major incision through the abdominal musculature to yank the sucker out. The procedure generally required at least a week long stay in the hospital for every 'consumer' of this technology....barring any complications.

Today, a sizable number of gall bladder removals are performed via laprascopy. Hospital 'Length of Stay' is way down...frequently, the patient leaves the day following surgery. Ergo, the costs for this improved health care technology are way down.

Now, does that mean that we get 2 million more Joe SixPack's each yr unilaterally deciding..."Dude, like gall bladder removal prices have like really gone down over the last few years. I think I'll go in and have that ole' knife weildin' surgeon cousin of mine yank mine out tomorrow....just cuz I can afford it now."

No, of course such a scenario is silly. There still has to be a *need* to have it removed, and the physician decides when that need should occur.

Mary J. McLaughlin writes:

Re: Medicare - We wouldn't have to change Medicare, if we got rid of the fraud in Medicare. My prescription drugs do go through Medicare Part B. Too many doctors over medicate their patients and have them go through unnecessary surgery and procedure. There were so many complaints at the Appeals Board in Washington, that Congress had to pass legislation Section 2230.5 that they could not pursue any complaint more than seven (7) years. In my case, it was a clerical error and Medicare agreed with me. The doctor was allowed to appeal for years with lame excuses not to show up at the hearings.

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