Does medical technology increase insurance costs?
May 19th, 2008 | by admin |Do advances in medical technology drive up insurance premiums? If so, why don’t advances in technology increase costs of other products?
Last Thursday the Rocky Mountain News reported that “Employers’ health insurance costs this year have climbed 12 percent above 2007 levels in Colorado and Wyoming.” The article paraphrases Jim Hertel, publisher of Colorado Managed Care Newsletter : “the increasing use of medical technology, such as imaging and implants … are driving up overall costs.”
Not so, says MIT economist Amy Finkelstein. Here’s an excerpt from an article in Business Week :
the real culprit for the rapidly rising cost of health care is the massive expansion of medical insurance over the past 40 years. Sure, new technologies play a role, but doctors, hospitals, and consumers adopt them so freely largely because insurance foots the bill. …
Why is insurance so important? One obvious reason, Finkelstein believes, is that consumers opt for more care if someone else pays for it. But the more significant effect may be that insurance guarantees a steady source of revenue for hospitals and other health providers. Such ready cash encourages them to build new cardiac-care centers and stock up on the latest high-tech equipment, knowing it will be paid for.
A solution is to eliminate policies that encourage people to buy prepaid health care, and instead buy real insurance. That is, get rid of the tax policy that allows your employer to buy you insurance without paying taxes on it. (One method is here .)
After all, consider the RAND Health Insurance experiment , which randomly assigned thousands of people to different types of insurance plans. Patients with higher deductibles spent significantly less on medical care than those with low deductibles, with no significant difference in quality of care or health of the participants.
This illustrates one of Milton Friedman’s categories of how people spend money:
Category III refers to your spending someone else’s money on yourself—lunching on an expense account, for instance. You have no strong incentive to keep down the cost of the lunch, but you do have a strong incentive to get your money’s worth. (Free to Choose , Chapter 4)
- Hat tap: John Goodman .
- For more on the RAND Study, see “I’m not going to pay a lot for this MRI !” , by Michael Cannon.
- Low-res video of Milton Friedman on spending .
- See also Devon Herrick’s Why are Health Costs Rising?
