Arnold Kling

Health Care Waste, Continued

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Interesting comments from Roy Poses at Health Care Renewal. He, er, poses an interesting question.


Outside of medicine, the price of technologies drop as they age. Admittedly, there have been many incremental improvements in CT scans, but there have been no revolutionary changes. In particular, the "C" in "CT" stands for computer. CT scans use computers to process multiple x-ray images into the images of body slices which we are familiar. The original CT scanners used main-frame computers to do the image processing. Main-frames were very expensive in the 1960's. Yet now one can get a personal computer that is just as powerful for a many orders of magnitude lower price. Since a large part of the expense of CT scanning used to be computer hardware and software, why hasn't the price dropped like the prices of other computer hardware and software?

Great question, and I wish I knew the answer. Perhaps the FDA approval process is an issue? Perhaps the compensation structure in government and private insurance is an issue? By that, I mean that perhaps the custom is to reimburse hospitals in a way analogous to the old "rate of return" approach to utility regulation, which encourages excess capital cost?

By the way, Poses and a number other commenters took me as suggesting that doctors are paid too much in this country. I should have made it clearer that this is not my view. Although I think that the supply side of medicine is poorly served by professional regulations, which probably artificially inflate the incomes of all licensed professionals, I do not favor a direct assault on doctor salaries. Nor do I claim that other countries pay their doctors enough.

What I was arguing was that doctor salaries are a more likely source of the difference in spending levels between the U.S. and other countries. (Poses offers some contrary data, which differs from what I've seen, but that is beside the point here.) But just because we pay doctors more does not automatically mean that we are right and other countries are wrong.

UPDATE: commenter Jim Erlandson points to this story, which suggests that, as with personal computers, the nominal price decline has been small relative to the quality-adjusted price decline.

For Discussion. Has the cost of computer-based medical technology remained anomalously high? If so, why?


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TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/220
The author at Business Word Blog in a related article titled Efficiency: The myth of medical waste writes:

    Arnold Kling at Econ Log says that other countries are not spending enough on health care, compared with the U.S. Anybody who discusses health policy should read this piece. Roy M. Poses, M.D., pretty much agrees with Kling in his post at Health Ca...

    [Tracked on March 23, 2005 1:53 PM]
COMMENTS (18 to date)
Mark Bigelow writes:

My wife had a CT scan a few months ago and while they did the processing on what appeared to be a small PC, the actual scan was done on a machine that went from the floor to the ceiling and was probably about 8 feet in breadth and 4 feet in depth. It looked to be a pretty new machine, also.

So, perhaps the cost of the processing technology has dropped but the cost of the photo technology has not, at least relative to the pace of technology improvement.

Additionally, I'm pretty sure the guy that ran the machine had to be licensed or certified to do so. Perhaps as we get more technology, more people are being forced to get certification to use the technology, creating a barrier to entry and inflating wages and, therefore, prices.

Just a thought...

Bob writes:

I challenge the claim that medical technology has not made revolutionary advances. Take imaging, for example: although CT has advanced incrementally (as has the PC), it has moved down the imaging chain from cutting-edge to front line. The resolution that is available from modern imaging technology, including but not limited to CT, is amazing, far beyond what was available 10 years ago. And the medical value of improved resolution can be huge.

In the 80s, a good PC system cost around $5K but performance continually improved. In the 90s a good system cost around $2K and the improvement continued. Now it's around $1K. Point is that as quality/performance rises, "prices" don't necessarily fall continually. But they should eventually. Does anyone know how the cost of basic CT (equipment, not scan) has fallen/risen over the past 20 years? And whether it is a competitive sector?

I think you'll find that in real dollars, the price of CT equipment and technology as well as the cost per procedure has dropped substantially since CTs were introduced in the early 1970s.

At least that's what I've been saying for the last 20+ years. To me, the CT's life cycle is the prime example of how the rich pay for new technology that, as it matures and wins a bigger market, eventually trickles down and becomes "affordable" for all.

The PC hardware is a small part of the technology. The software development, upgrading and maintenance is the real cost. And then add the cost of the spectacular hardware that the patient sees. Meanwhile, labor costs in hospitals are rising faster than in most other settings, I suspect, especially if there are shortages of imaging technicians. Not up to date on that, but should be.

And, finally, there are the huge regulatory and product liability costs that GE and others have to pay. GE Medical dominates the market and can charge pretty much what it wants, which it probably does, especially when it comes to service and support contracts. Once a hospital adopts a brand, it tends to stick with it, and GE is the market leader by far. It's the Caterpillar and Apple of the industry.

So you have to look at the total cost of ownership, not just the price of a PC.

Bob writes:

DJ,

Thanks for the info. Sounds like the PC hardware analogy is far from complete - it might be better to think of medical technology as a full PC (haven't noticed Microsoft's prices falling...) system with various components and ongoing costs that are not necessarily subject to fierce competition (HP has been enjoying pretty fat margins on ink...).

Maybe the analogy is actually more useful in reverse - now we have an idea of how much computers were cost if they were subject to the same regulations and legal liabilities as medical diagnostic equipment.

spencer writes:

I would think that the costs of the PC harware is a very small portion of the cost of a scan. I am willing to bet that the bulk of the costs is the salary of the people performing and reading the exam. I am just making this up, but if it takes a medical doctor 15 minutes to read and analyze a scan I really doubt that there is much that can be done about that. As a matter of fact I have seen articles about oursourcing that part of the process to India to save cost.

Interestingly, in a question and answer session the other day a member of congress asked Greenspan why we should not address the question of healthcare costs now rather than SS. He said he expected a productivity improvement in healthcare like we have seen in other areas to solve the helathcare costs problem. Personally, I do not give much credence to that answer.

On a related point. In your discussion of life expectency the other day you talked about the case of your wife recovering from cancer. Fantastic. But you said it would not impact longivity stats until she died. That is not correct. The data is calculated every year, and in the calculation the numer of deaths in each death cohart is included. If she was 30 at the time the number of 30, 31.. 35, years olds has improved as a consequence and that has impacted the life expectency data. The impact on life expectency of her living shows up in the data in the next year. You do not have to wait until she dies for it to impact the data.

Jim Erlandson writes:

Lots of CT (now called MDCT for Multi-detector CT) facts can be found here in the article MDCT: A Disruptive Technology Evolves.


With respect to hardware costs:

Direct acquisition and imaging costs of MDCT are not significantly different from those of single-slice technology. That is, the price of a multi-detector CT today is about the same as the price of a single-detector scanner purchased new 15 years ago ... Maintenance costs and service contracts may run slightly higher than on less complex devices, and replacement costs of components such as the x-ray tube can be yearly and significant.

Rather than comparing an MDCT (an extremely complex device to develop and manufacture) to a personal computer (a relatively simple device, sold by the tens of millions every year), Mr. Poses should compare it to an automobile. Over the past 40 years, automobile prices have gone up as have their quality, reliability, features and style. Although economists have no interest in style.

Its interesting to note that an Intel 8080 processor sold for $75 in 1974 -- the year the EMI MkI scanner was introduced. Today's high performance Intel processors (3.73 GHz LGA 775) have a list price of $999.

And finally, back in the days just after the earth cooled, the only way to see what was going on inside a patient's sore belly was to open him up and take a look. Today its off to radiology for some pictures. We should be comparing the cost of a scan to that of a laparotomy.

Arnold Kling writes:

Spencer wrote,
"The impact on life expectency of her living shows up in the data in the next year. You do not have to wait until she dies for it to impact the data."

You missed my point. I believe that she would be alive today whether she had been treated or not. That is why she has no effect on the longevity statistics. Two to five years from now, when an untreated woman would be dead, she will affect the longevity statistics. But even then, the full effect won't really show up.

Lawrance George Lux writes:

The Overhead Cost of advanced Hospital and Clinic facilities stand as the primary factor of specialized Procedure Costs. They build and rebuild facilities to optimize Tax investment credits. lgl

Jim Erlandson writes:

lgl: Please explain how a non-profit hospital utilizes "Tax investment credits."

In any case, if high fixed costs are the problem, more volume (more patients, more procedures) will lower the cost per procedure. And how do you drive volume? Better service and lower prices.

The computer components of a CT scanner are only a small part of the overall machine. The actual imaging hardware (X-ray tubes, detectors, ring apparatus, servomotors, etc.) are very complex and require a lot of maintenance, calibration and adjustment.

I agree that CT scan costs are way too high, but due to political, market, skewed-incentive and related reasons. There is some valid argument that these machines are still highly complex and expensive to maintain.

Of interest, when I worked in Workman's Compensation many years ago, prior to my involvement in Medical Informatics, I observed that CT's were abused in 2 ways: overused (with generous reimbursement from the state worker's comp programs) and misused (prized for their ability to show "bulging disks" which are usually asymptomatic but were a huge prize to those wishing to "prove" injury and be compensated - including the lawyers, of course).

I doubt things have changed much.

superdestroyer writes:

With all high tech medical equipment, the problem is that the market is just not that big. Varian is the world leader in radiation cancer therapy machines and probably sells less than 300 per year. The CT's sold in the US probably total less than 1,000 and cost around $1.5 million including hardware, software, installation, and training but does not include operating costs and the $100K a year service agreement.

I do not know how you would compare a high tech system that is sold in such low volunes to the total cost of ownership of a desktop PC that sell millions every year.

Dave Schuler writes:
Great question, and I wish I knew the answer. Perhaps the FDA approval process is an issue?
I believe I can contribute part of an answer since it's an area in which I have some expertise. I was part of the design team for a CAT scanner some years ago and did quite a bit of the implementation as well. I proposed many approaches that would have saved quite a bit on both hardware and software costs without reducing functionality, reliability, or performance. I was frequently met with the answer “We want it to be expensive”. The medical technology marketplace is a perverse marketplace. There are too many docs involved in the process and they don't respect anything unless it's expensive.

There are other factors as well: unrealistic (and irrelevant) expectations, high cost of entry, not invented here, and many others.

And don't get me started on hospital information systems.

Lawrance George Lux writes:

Jim,
Non-Profit medical facilities will not scalp for- Profit facilities out of professional courtesy; easy to do as they devote excess Profits to Salary increass and Outreach programs. lgl

Susan writes:

Looking at the balance sheets of so-called 'healthcare' companies, one sees profound profit. They are neck and neck with the high techs in profit margin. It has annoyed me how the media portrays medical costs as 'skyrocketing' when, in fact, what is going up are corporate profits. United Health had a net profit of arouond 6 billion dollars last year. If they settled for 1 billion in profits, I wonder if we'd still believe that the delivery of healthcare was so expensive? BTW, 13 percent of most healthcare corporate profits go to administrative costs. Not.....technology. The other big cost are drugs.

Jim Erlandson writes:

Susan: If by "United Health", you are referring to UnitedHealth Group (UNH), their profit last quarter was $739 million on $10.51 billion in revenue. While healthy, the profit was far short of your claim of $6 billion for the year.
BTW,

13 percent of most healthcare corporate profits go to administrative costs.

Perhaps you meant that 13 percent of revenues go to administrative costs.

Keith Perkins writes:

It should be noted in this discussion that laser eye surgery has been getting consistently better and cheaper, too. Since this is typically not covered by insurance, it has been inferred that higher competition and lower regulation have been a boon for consumers.

Assuming that is so, the comparison with CT scans is striking.

Scott Peterson writes:

With respect to Greenspan's conjecture that productivity improvements would solve the healthcare cost problem, I disagree. Although currently existing medical procedures and technology will indeed be often used more efficiently and at less cost due to cost/volume relationships, there are always additional medical conditions for which treatments are found for which the early adopter costs are sky high and which patients demand to be treated for. The problem with American health care economics is that generally cost/benefit analyses are not done and in the case of government funded health research are not allowed to be done.
For example, in 95% of cases, a knee replacement for an 85 year old patient is not warranted given the patient's expected remaining life span and the cost of the procedure. But physicians will recommend said procedures because Medicare will cover it and it doesn't take much to convince the patient that the procedure will be a benefit to them.

jim linnane writes:

The case of laser eye surgery points to the answer. For most of health care there is no market and no way of knowing the real cost or price of any individual part. Payment for CT scans is almost completely dominated by third parties who negotiate volume discounts for individual services with physicians and clinics and volume discounts with hospitals for individual cases. Hospitals cross subsidize within the facility to tailor the case rate for particular payers. State regulations designed to control costs erect formidable barriers to new technology. Suppose someone were to develop a technology to do what CT scanning does but in a different and more efficient way than GE's machines do. What would it cost in terms of surpassing regulatory hurdles before they even got to the point of being allowed to market the product? If the new product does get into hospitals, clinics, and doctors' offices how would those providers price it to insurers, and would they even bother to offer it if it meant margins lower than what they get for CT scans? Greenspan is no dummy. He must be thinking that a new paradigm of payment for health care has got to emerge - HSAs anyone? or health care costs will either bankrupt the economy or lead to severe rationing as is happening in Canada and the UK.

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