Does Better Health Care Mean Higher Costs?

Medical innovation boosts life expectancy, not spending

According to the conventional wisdom, the United States faces a massive medical bill thanks to our use of pricey new treatments and equipment. "About half of all growth in health care spending in the past several decades was associated with changes in medical care made possible by advances in technology," a 2008 Congressional Budget Office report declared. "Health care economists attribute about 50 percent of the annual increase of health costs to new technologies or to the intensified use of old ones," the bioethicist Daniel Callahan writes in his new book Taming the Beloved Beast: How Medical Technology Costs Are Destroying Our Health Care System.

This is familiar territory for Callahan, who for decades has advocated reining in medical innovation to reduce health care costs. He also favors limiting the life-extending treatments that older people receive, on the grounds that most of them will "have lived a full and fruitful biographical life prior to age 70." Interestingly, Callahan, age 79, underwent a life-saving seven-hour heart procedure in August that cost upward of $100,000.

In his new book, Callahan complains that "American health care is radically American: individualistic, scientifically ambitious, market intoxicated, suspicious of government, and profit-driven." He's right at least about our high-tech vitality: The U.S. does develop and deploy medical innovations much faster than other rich countries. New pharmaceutical products generally hit the market here two years earlier than elsewhere, according to a December 2008 report from the business consultancy McKinsey, which also blames high-tech medicine for escalating costs. The McKinsey report further notes that American physicians are "much quicker to adopt new surgical techniques and advances in anesthesia." The top five U.S. hospitals alone conduct more clinical trials than any other single developed country.

But is high tech medicine really to blame for rising health care costs? Last June Columbia economist Frank Lichtenberg published a study that suggests the opposite. Advanced medical technologies, Lichtenberg suggests, are not contributing to rising American health care expenditures because the money they save makes up for the money spent on them.

Lichtenberg begins by looking at how the rate of increase in longevity has varied among U.S. states between 1991 and 2004. He investigates how such factors as the quality of medical care, behavioral risks, education, income, and insurance coverage affect life expectancy. To measure differences in the quality of medical care, he examines how quickly each state took up advanced medical diagnostics and new drugs. He also calculates what fraction of physicians in each state was trained at top-ranked medical schools.

Lichtenberg's most important finding is that innovation is worth the cost. Life expectancy increased faster in states that more rapidly adopted advanced diagnostic imaging techniques, were quicker to use new drugs, and attracted an increasing proportion of doctors from top medical schools.

Between 1991 and 2004, the average life expectancy at birth in the U.S. increased by two years and four months. During that time, Lichtenberg finds, the use of advanced imaging procedures nationwide almost doubled, rising from about 10 percent to nearly 20 percent. Lichtenberg calculates that the deployment of such diagnostic techniques as CAT scans and MRIs was responsible for boosting average U.S. life expectancy by about eight months during this period. He estimates that the adoption of newer drugs increased average life expectancy by another 18 months. By contrast, the fraction of physicians being trained at top medical schools has declined, which Lichtenberg reckons has reduced overall life expectancy by three to five months.

Interestingly, Lichtenberg found that "growth in life expectancy was uncorrelated across states with health insurance coverage and education, and inversely correlated with per capita income growth." The last finding is a bit puzzling. Lichtenberg calculates that the average 20 percent increase in real per capita income lowered average life expectancy by four to five months, and he finds that states with high income growth had smaller longevity increases. He does not speculate on why higher incomes are associated with shorter lives. Perhaps richer people engaged in riskier behaviors. For example, binge drinking in older men correlates with higher incomes.

In any case, it looks like high-tech medicine and better physician training boost life expectancy. But what about costs? Are Callahan and the rest right to blame technology for the high price for modern medicine?

To answer that question, Lichtenberg looked at per capita medical spending by state. The top six states used advanced imaging diagnostics roughly 30 percent more often than the bottom six, for instance, making them ripe for comparison. He found that the states with larger increases in high-tech diagnostic procedures, newer drugs, and higher quality physicians did not have larger increases in per capita medical spending.

"The absence of a correlation across states between medical innovation and expenditure growth is inconsistent with the view that advances in medical technology have contributed to rising overall U.S. health care spending," Lichtenberg concludes. He speculates that states that have more quickly adopted high-tech procedures have not seen their health care expenses increase because "while newer diagnostic procedures and drugs are more expensive than their older counterparts, they may reduce the need for costly additional medical treatment." In other words, high-tech medicine may initially cost more, but it reduces spending in the long run while increasing patients' life expectancy.

Callahan has a solution to the alleged problem of escalating technological costs: adopt the methods used by Europe's government-funded medical systems. "They use—among other tools—price controls, negotiated physician fees, hospital budgets with limits on expenditures, and stringent policies on the adoption and diffusion of new technologies," he writes. In other words, stifle innovation.

The legislation wending its way through Capitol Hill adopts many of these practices. The bill that passed the House, for example, would essentially impose price controls by cutting physician Medicare reimbursements by 20 percent. Provisions in the bill that aim to compare the effectiveness of treatments could easily evolve into a policy of limiting technologies based on bureaucratic determinations of cost-effectiveness.

"Cutting the use of technology will seem wrong—even immoral—to many," Callahan admits. Well, yes. And if Lichtenberg is right, slowing technological progress in medicine wouldn't even save money. But it definitely would kill more people.