Things People Believe That Make No Sense

You often hear people say that one of the main reasons for health care inflation is the cost of all the new technology.  But can you name any other industries that compete in free markets where technology introductions have caused inflation rates to run at double the general rate of inflation?  In fact, don't we generally associate the introduction of technology with reduced costs and increased productivity?

Compare a McDonald's kitchen today with one thirty years ago -- there is a ton of technology in there.  Does anyone think that given the price-sensitive markets McDonald's competes in, this technology was introduced to increase prices?

Or look at medical fields like cosmetic surgery or laser eye surgery.  Both these fields have seen substantial introductions of new technology, but have seen inflation rates not only below the general health care inflation rate but below the CPI, meaning they have seen declining real prices for decades.

The difference is not technology, but the pricing and incentive system.  Cosmetic surgery and laser eye surgery are exceptions in the health care field -- they are generally paid out of pocket rather than by third parties (Overall, third party payers pay about 88% of all health care bills in the US).

The problem with health care is not technology -- the problem is that people don't shop for care with their own money.

Postscript:   Thinking some more after I wrote this, I can think of one other industry where introduction of technology has coincided with price inflation well above the CPI -- education.  It is interesting, but not surprising to me, that this is the other industry, along with health care, most dominated by third party payer systems and public subsidies of consumers.

  • Bearster

    Another thing that people believe, which makes no sense, is that "inflation" is rising prices. Inflation is an expansion of credit money in a fiat system like ours.

    Rising prices are one possible consequence of inflation, though some prices (e.g. lasik eye surgery and computers) can fall despite inflation.

  • http://www.camalg.co.uk Nigel Sedgwick

    What about defence, and law and order: in fact much where there is government monopoly or government licensed monopoly/guilding.

    Best regards

  • David W

    I think I can name some industries that grew dramatically as a share of GNP, faster than inflation - aviation from 1900 on, computing from 1980-present. Any particular computer went from 'ouch' to 'sure, I'll buy that' to 'free to take', but yet the total spending on computers went up. I consider healthcare to be in a similar boat, except that the third-party payer structure keeps individual component prices from falling as far or fast as they might otherwise.

    It's not so much 'technology' as that the definition of health care keeps expanding. Most any particular treatment, drug, or service does get cheaper, except when the incentives you describe go wrong. It's just the much larger number of things that can be treated makes the total cost go up anyway.

    But to use your example - McDonald's technology almost all applies to produce the same burgers and fries that they always did, just more cheaply. There are spots they've added technology to increase prices - by offering Angus burgers, or fresh salads. If cancer were still treated by the doctor suggesting it's time to write your will and have your relatives visit, then we'd have an apples to apples comparison and I bet overall healthcare prices would have fallen.

    And the main evidence I've seen that supports this view is that spending on veternarians' services has gone up about as fast as spending on humans, despite being almost entirely a cash business. I wish I remembered where I saw that comparison.

  • mysterian

    There are two supply bottlenecks that shouldn't be overlooked: doctors and medical devices

  • Paavo

    I think that Unions in healthcare are horrible causing deaths and suffering, but I guess there is a case to be made, that the price for not not dying is not like the price for bic mac. Without the unions the healthcare would still be very expensive. getting rid of unions would give better quality not cheaper prices.

    Increasing your longevity is cheaper than it was. But having the best care money can buy is not cheaper than it was 50 years ago. When people are richer they will spend greater percentage of their wealth for longevity. It's not surprising that healthcare takes greater percentage of earnings.

  • Bob Smith

    "And the main evidence I’ve seen that supports this view is that spending on veternarians’ services has gone up about as fast as spending on humans, despite being almost entirely a cash business. I wish I remembered where I saw that comparison."

    I'd blame licensing for that. Rather, the lack of a free market in licensors and the general failure to expand available veterinary slots in line with population increases.

  • http://g_trude@yahoo.com greg

    automobiles....

    To use just one example, my 1983 Datsun 280ZX listed new (in '83) at ~$3800. A comparable Nissan370Z today would run just over $40K. This is just one example, but I think is rather typical with cars.

    Now, I obviously get a whole lot more car now than I did in my '83 model, with a ton more safety features (many of which are federally mandated). But I still think automobiles is one area where the introduction of "technology" has not lowered prices.

    I go back and forth with the marketing guys at work over this (and televisions) quite a bit trying to understand it.

    At the heart of it, I think it's the consumer's willingness to pay more for a better product, but that seems like a rather weak explanation.

    For the record, I'm in complete agreement with Warren's post regarding health care....incentives matter!

  • Jim

    Don't forget about the "non-neutrality" of money. In short, where "new" money is pumped into the economy, (often those industries that the government is most involved in) prices of consumed factors of production are bid up before the progressive devaluation of the monetary unit cascades through the rest of the economy. This then leads to dramatic end user cost increases in those industries prior to a general price inflation.

  • Sam L.

    And education has some/a-lot-of highly paid administrators, and a lot of administration to cope with federal regulations, and file innumerable paper reports.

  • Dr. T

    Improved technology directly resulted in escalating medical costs, but not for the reasons bandied about by the media. When a new technology is introduced, the costs are high. The equipment is very expensive (eg: the first fiber optic endoscopes), and few physicians know how to use the equipment (the early days of laparoscopic surgery or coronary artery stents) which creates high demand. Thus, then initial reimbursement for using the new technology is very high. The problem is that the high reimbursement is practically carved in stone, and years later, when costs for the technology have fallen by a factor of five, reimbursement might not have fallen at all. That's why "proceduralists" two to five times more money per hour than "medicalists." Gastroenterologists who spend half their day looking through scopes stuck in peoples mouths or anuses make far more money than gastroenterologists who rely on medical histories, physical exams, lab tests, and plain old x-rays to diagnose problems. Cardiologists who shove fiber optic catheters from leg vessels into the heart or coronary arteries earn far more money than those who just listen to hearts, read electrocardiograms, and look at lab test results to make diagnoses. Because of our inflexible reimbursement system (controlled by Medicare government bureaucrats and an advisory panel from the American Medical Association), everyday tried-and-true procedures get reimbursed as if they were rare and semi-experimental.

    By the way, laboratory testing is the best bargain in health care. Due to improved technology and phenomenal automation, costs per test continually fall even though turnaround times (the time between physician order and results reporting) are shorter and shorter. Hospital patients do not see this because lab testing is not separately billed, and outpatients do not see this because lab test charges are far higher than lab test costs. (The only patients who pay list prices for lab tests are those without insurance. Insurance companies typically pay about one-third of list price.)

  • IgotBupkis, President, United Anarchist Society

    > Now, I obviously get a whole lot more car now than I did in my ’83 model, with a ton more safety features (many of which are federally mandated). But I still think automobiles is one area where the introduction of “technology” has not lowered prices.

    AAnnk. Sorry, Greg.

    You DO get a lot more car, most of which is safety features and emission controls. Both have added massively to the cost of car production, while substantially increasing the overall safety of the car and lowering its release of any number of smog components... The third major price component is gew-gaws -- That 1983 model Datsun probably had a radio as an optional feature along with a lot of other things optional -- power windows, possibly the AC, etc... Most of that stuff is standard, now. There are also "now standard" performance improvements which have also been added -- the suspension, the drive train, the quality and reliability of the tires (almost certainly notably wider than the OE on that 83Z) -- all these add a few bucks here and there to the cost of the car, which is then hit with the "multiplier" effect on the delivery end.

    Add to that the fact that, in 1983, Datsun/Nissan was in the process of overcoming the "cheap" image Japan had, which meant they did not have the same kind of name/reliability recognition for their cars. The Z has moved from a straight sports car to a luxury high-end sports model -- from "Camaro" status to "Corvette" status. That, too, means that Nissan can charge more.

    So your thesis is somewhat specious in its basis. You are comparing apples to oranges, and changing between Granny Smith and Yellow Delicious in mid-comparison to boot.

  • perlhaqr

    Hrm. Well, while I agree that the price signaling insulation of third-party payers has likely strongly contributed to this effect, I think the "bleeding edge" (if you'll excuse the pun) technology aspect of it is involved as well.

    In the early 90's, DVD players were stupid expensive. Early adopters bought them anyway, and now they're, well, obsolete. Big flatscreen TVs (I mean the 50+ inch range) were a $10k purchase in 1998, and that's in 1998 dollars. Now they can be had for $1000 highly inflated 2011 dollars. In 1986, a 10 megabyte hard drive cost $1000. Now you can buy a 1 terabyte drive for less than a hundred dollars.

    The same thing occurs with medical technology, and the things done in the medical field on a daily basis (call it the DVD player level stuff of today) continues to grow (not 5 hours ago now I helped as a medical tech used a microscopic camera to guide a breathing tube past a very ill woman's vocal cords and down into her lungs, so we could have a computer breathe for her; shortly after that we put a man through CT, and if you've never seen that you are truly missing one of today's modern marvels) but the demand for the absolute top of the line miracle stuff is a near constant 100%. Every sick person wants to be healthy. As a general rule, none of them care what it costs when they're laying there dying. If it's been invented, and it will keep them going for 10 more minutes, they want it.

    The state of the art keeps increasing faster than the price deflationary influence of mundanity can help reduce overall costs. Everyone wants the equivalent of the $10k TV.

  • me

    Speaking of things that people believe that make no sense, this one had me LOLing in no time flat:

    "Richardson says that the film and TV subsidy has brought "nearly $4 billion into our economy over eight years" and has created 10,000 jobs. By "our," he means New Mexico. He says every state should emulate this success."

    (from http://www.latimes.com/news/opinion/commentary/la-oe-kinsley-column-movie-subsidies-20110301,0,2716680.story via http://www.marginalrevolution.com/marginalrevolution/2011/03/sentences-of-the-day.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+marginalrevolution/hCQh+(Marginal+Revolution))

  • Ted Rado

    I had quad heart bypass surgery eleven years ago, after a heart attack during a hiking trip to Arizona. The original stent deal in AZ was $54K plus 5K for the helicopter ride. The surgery in OKC was much more. I later had a minor stroke in Vermont, with follow up cath lab work in OKC. None of these procedures were possible several decades ago. Hence the high cost of medical care.

    When I was a boy, medical care was the doctor visiting your home with his black bag. It is nonsense to say that the new system, with all these new procedures, is not a whole lot more expensive. In the old days, I would have died, saving society lots of money. We are trading off much higher costs for much improved medical care. How much more clever technology can we afford before we reach a point of diminishing returns? That is the key question.

    I know of a man in his nineties who had bypass surgery. He died two years later anyway. Although nobody wants to let Grandma die, there surely is some age or poor physical condition where it should be decided that the money is better spent elsewhere. I sometimes feel guilty about how much medical care money was spent on me when I was in my 70's.

    To suggest that costs come down with better medical technology is nonsense. One cannot compare tech advances in other industries to medical care. The first is to save money, the second to save lives. Some technologies, such as use of computers, surely reduce costs, but all the new procedures add huge costs.

  • the other coyote

    Ted,

    You hit the nail on the head with why technology makes health care more expensive. I have a similar story to share - after six months of dizzy spells and occasional hearing losses, I found a doctor to send me for an MRI. Turns out I had a brain stem tumor. I went to a cancer hospital and they took many more pictures of the tumor, trying to figure out where it went, what it was attached to, and how they were going to get it out. Then I went in for surgery, and my surgeon basically cut my head off to get at a massive tumor located behind my right tonsil. He taped me back up and I left the hospital THE NEXT DAY. I was 41 years old at the time.

    40 years ago, I would have just died one day, for no apparent reason. So $2500 in diagnostic film never would have been spent, nor would $20,000 for the surgery and after care.

    80 years ago, my three sisters and I would have been born at home, with no epidural, like my mother and her 5 brothers and sisters were. No $5-10k hospital bills for babies.

    Where I have to disagree with you is this: if I choose to spend a lot of my money on a health insurance plan, I should get as much treatment as I have bargained for. I find the idea that somebody OTHER THAN ME gets to decide what treatment I get extremely distasteful. If I have bought and paid for the plan, I deserve to have bypass surgery in my 90s if I want it. If I am 25 and choose not to insure against the need for bypass surgery well, I can work out a payment plan with a health care provider, or rue the day that I chose to spend my disposable income on IPads and beer instead of my own health.

    The AMA has had a lock on how many people get to go to medical school in the US for decades, effectively creating a doctor shortage so their members would be fully employed. The ABA has not demanded limited law school admissions, resulting in the mobs of lawyers we see on every bus stop bench. Universities have been willing to go along with the AMA's class -size limit for a reason: med schools are expensive. Labs, supplies, all take money. Law schools are cheap; you just add another chair to the end of the row in the lecture hall, collect the tuition check, and move down the road.

    Interestingly enough, due to diversity initiatives, there is now a rural large-animal vet shortage in this country. For 20 years, vet schools have admitted 50% women, resulting in a glut of kitty and puppy vets, and a shortage of cattle and sheep vets in rural areas (some women will go into the horse vet business, but again, only in suburban/exurban areas). It's a good thing for the vet business that pets are the new children, because without people willing to shell out more money for Fido's dental care than for that of their own children, puppy and kitty vets would be waiting tables in L.A.

  • Bill

    Someone, perhaps on this blog, said it best when he or she said "the reason health care costs so much is because health care is expensive."

    It just plain costs a lot, espectially at the margins and for the new stuff. Nobody wants to make the rational argument that if we, the people, so vote (and perhaps if the Constitution is amended), then we could, as a society, ration care, and spend maybe 60% of what we are spending now and get like 90% of the results we are getting now. (Using Western Europe as an example and assuming relatively efficient administration, again, like one can observe in Western Europe).

    Instead, one side claims government can increase efficiency and make care better and cheaper. Of course it cannot. The other side, however, seems to deny that single payor systems empirically achieve relatively decent outcomes, and that rationing scarce resources on a societal level, while idealogically distasteful to some, is not a super weird or unprecedented facist-like idea.

  • Dan

    Greg,

    I have to correct you on the price of a 1983 Datsun 280 ZX. My dad bought a 280 ZX in 1979 and it was way more than $3,800. More like $10,000. And that was four years before your 1983 Datsun came out.

    In fact, for $3,800 in 1983, you couldn't even buy an economy car, let alone a fancy sports car like a 280 ZX. And by 1984, a turbo 280 ZX was listing for $17,000.

  • Benjamin Cole

    Military hardware and services also just cost more and more and more...VA budget now busting $100 billion a year...no end in site....

    Soon we will pay for a $1 trillion military-foreign establishment-VA paras-te complex--every year.

    And after spending $10 trillion in the next 10 years, I can assure you we will hear that the wordl is not safe, that equipment is old and outmoded, that recruitment efforts are suffering etc etc etc.

  • Dan

    Benjamin:

    Great post. Absolutely right. I love how the Republicans talk a good game about fiscal responsibility - until it comes to the military budget.

  • Ted Rado

    The other coyote:

    I agree with you. If you want to buy expensive health insurance that covers everything completely, good for you. The problem is that Medicare and Medicaid are mostly paid for by someone else (taxpayers). I believe anyone would agree that people will not use more "free" healthcare service than they would if they had to pay for it themselves.

    My own insurance recently increased the co-pay for all services. I think this is good as it will reduce frivolous doctor visits.

    There is some percentage of GDP that can be spent on each part of our costs (medical care, housing, food, education, etc.). One can change the allocation but the total cannot over time exceed the GDP. Everytime someone wants to cut back somewhere, they are demonized as being against old folks, education, or whatever. Hence the politicians stall rather than face difficult choices. Sooner or later we will have to face the music.

    I don't know what the answer is, but without calm, thoughtful deliberation and a willingness to make difficult choices, our whole medical system will founder. Doctors will quit, insurance companies will go out of business if the pols sqeeze them enough. The notion that everyone is entitled to unlimited expensive procedures into their nineties has got to be put to rest. There simply is not enough money. In the meantime, medical research will come up with new procedures, equipment, drugs, etc., which prolong life but make the cost situation even worse.

    There ara a lot of peripheral issues, such as tort reform, the come into play. Here again, the pols knuckle under to their lawyer buddies, while doctors prescribe all sorts of extra tests etc to cover their asses.

    Where is a sensible gutsy leader when we need one?

  • http://www.green4care.com johan

    yeah this was really true .thank you.........