The Only Industry Where Technology Increases Costs — Healthcare

The average cost of an inpatient hospital stay increased 90 percent between 2000 and 2010 — from $17,390 to $33,079 — according to a new report by the Health Industry Distributors Association. A 90 percent increase in 10 years is a jaw-dropping increase. Comparatively, the average rate of inflation for the years 200-2009 was just 2.56 percent per year (or, approximately 26 percent over a 10 year period).

This considerable increase in hospital costs is greatly concerning especially given the fact that healthcare providers have been focused for many years on reducing costs.

Why have these efforts largely failed? Why are the costs so much higher year after year?

In a fascinating article published in the September issue of MIT Technology Review, Dartmouth economist Jonathan S. Skinner, PhD, explains just why healthcare growth "drags the U.S. federal government into debt and wipes out any wage growth for the average American." (I'm going to summarize some key points of the article below, but I highly recommend reading it in its entirety.)

The answer, paradoxically, is technology. Dr. Skinner poses the question in one of the best ways I've seen it presented to date:

"In every industry but one, technology makes things better and cheaper. Why is it that innovation increases the cost of healthcare?

In computing, for example, Moore's Law states that the cost of a technology (processing power per dollar) will be cut in half every two years due to new advances.

 

Dr. Skinner believes there are two main drivers of increasing healthcare costs: 1) many new technologies/treatments are costly, but provide little or no additional value compared to current treatments, and 2) insurers often pay for any treatment that doesn't "obviously harm the patient," due to a lack of research on comparative effectiveness.

In fact, according to the Institute of Medicine, more than half of medical treatments lack clear evidence that they are actually effective, and as Heath Affairs explains in a policy brief:

"In cases where there are two different treatments for the same condition —  for example, surgery versus medication — there is only rarely adequate evidence about which one is more effective."

To Dr. Skinner's first point, he argues that technologies can be categorized according to their "health benefit per dollar." Treatments with high HBPDs (category 1) include low-cost antibiotics, which are inexpensive and provide significant benefits. Similarly, HIV drugs, he argues, are costly, but prolong life for years. Some technologies provide benefits for some patients but fail to for others, making their HBPDs highly variable (category 2). Other technologies provide low HBPDs (category 3) because their costs are high and benefits are small or not supported by research. Dr. Skinner writes:

"Much of the increase in observed longevity is generated by the first category of treatments. Most of the spending growth is generated by the third category which the U.S. healthcare-system is unique, and perversely, designed to encourage."

What are some of these questionable "category 3" technologies?

A Wall Street Journal report recently highlighted one: proton beam therapy for treating prostate cancer. Many providers have built and promoted new "proton beam centers" despite the treatment's high cost and lack of research demonstrating it's any more effective than previously available treatments, such as radiation. According to the WSJ report, proton beam therapy costs Medicare $32,000 (private payers are paying much more to be sure) while radiation costs the program $19,000.

A Bloomberg report from yesterday similarly questioned the comparative effectiveness of robotic surgery for hysterectomy, citing a study in Obstetrics & Gynecology. "The robot operations cost hospitals $2,489 more per procedure with a similar complication rate as the standard practice of removing the uterus with minimally invasive equipment," stated the Bloomberg piece.

The alarming rate of growth in healthcare costs isn't something that the government or consumers are ignoring. And some private payers, for their part, are also refusing to pay for costly treatments that can't be proven to be more effective than existing treatments. I should note I'm not advocating these treatments be banned, but transferring the costs of more expensive treatments without considerable additional benefit to patients who can, if they so choose, opt to obtain the treatment at their own expense (outside of their public or private insurer), will create significant headway toward reining in our growing healthcare costs.

Much, much more research must be done on the relative value of new technologies and treatments. The good news is that the government has increased funding for comparative effectiveness research through the American Recovery and Reinvestment Act and the Patient Protection and Affordable Care Act. However, this research will not take into account the cost of treatments. According to the Health Affairs brief:

"Cost-effectiveness research, which has been debated in Congress for many years, is largely excluded from the comparative effectiveness research effort created through national health reform legislation enacted in March 2010."

 

Comparative effectiveness research is a step in the right direction, and can lead to reduced costs due to smarter use of treatments, but it doesn't go far enough in my opinion.

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