The Effects of Medical Technology on The U.S. Economy

Charlie Rosenblum ’18 is an Economics and French major at Grinnell College interested in health economics and development.

 

On March 23rd, 2010, President Barack Obama signed the Patient Protection and Affordable Care Act (or ACA for short) into law. Like many actions that come with the presidency, this was followed by much controversy as critics noted that this plan would increase taxes and overall healthcare costs, something the government did not and does not need with an extremely large and growing debt. While healthcare costs have increased significantly since the mid-20th century, social reforms are not to be blamed for all costs and should not be solely blamed for future costs. In fact, medical technology is the most substantial reason why healthcare costs have increased.

Medical technology has always been a significant area of medicine and has a long, rich history. Examples of technological advancements in medicine throughout history include the magnifying glass in 1250, the flexible catheter in 1752, and DNA sequencing in 1992 [1].

DNA Sequencing (wikipedia.org)
An example of DNA Sequencing Photo Credit: Wikimedia

These inventions among many others have contributed to people’s health, wellness, and lives and have created significant economic effects. But in the past half century or so, the steady trend of technological advancement has increased more than average, especially in the medical field. As a result of this growth, healthcare costs have also risen. With the increased advancement in medical technology, there has been an increase in economic activity and human development but, as a result, healthcare costs have also risen.

Medical Technology Defined

Because medical technology is a relatively new concept to be thrust in the media spotlight and is a growing and profitable area of business and innovation, there has been some argument about what it is and what it encompasses. The World Health Organization

Polio vaccine poster from 1963 Credit: Wikimedia
Polio vaccine poster from 1963
Photo Credit: Wikimedia

defines medical technology (or health technology) as the “application of organized knowledge and skills in the form of devices, medicines, vaccines, procedures and systems developed to solve a health problem and improve quality of lives” [2]. Note that this definition does not limit medical technology to only devices but also includes medicines, vaccines, procedures, and systems. This gives breadth to even more medical advancement including but not limited to pharmaceutical drugs, cancer treatments, and noninvasive surgeries.

It is also important to recognize that there is no “correct” way to measure the economic impact of medical technology. Due to the size of the medical industry and the continuous advancement of medicine and medical technology, any direct ways of measuring medical technology’s economic effects are unfeasible [3]. Because of this, the economic effects of technology are measured indirectly and thus the methods of researching and results of medical technology’s economic impacts will differ between papers and articles differ. Therefore, while this article may write about how one aspect of medical technology is a detrimental cost to the economy, another article may have used different calculations to receive a different conclusion.

Medical Technology and Economic Growth 

Medical technology has had a significant, positive impact on economic growth. While GDP  measures the size of a nation’s economy, it can also measure economic and human development of said nation. The development and diffusion of medical technology has led to economic growth both on a micro and macro scale [4]. Multiple economic models highlight positive economic growth due to technological advancement. One notable model is the Solow-Swan Model (or Solow Growth Model) which indicates that increases in capital, labor, and technological advancement result in economic growth. However, the advancement in human development with respect to technology illustrates the positive economic effects: “the positive correlation between human development and GDP is not due to reverse causality but that high levels of human development and of technology change both significantly improve economic performance” [5]. This underlines the positive economic effect of medical technology because with the advancement of technology, especially medical technology, there is positive growth in human development corresponding with growth in GDP. Medical technology helps advance human development through disease prevention, employment growth, increased longevity.

To fund the advancement of medical technology, research, and innovation, the U.S. government spends a portion of its GDP on healthcare. And with increasing advancements in medical technology, healthcare spending has increased dramatically. From 1970-2005,

U.S. Healthcare Spending as a Percentage of GDP Credit: Wikimedia
U.S. Healthcare Spending as a Percentage of GDP
Photo Credit: Wikimedia

healthcare spending as a portion of GDP has more than doubled from 7.2% to 16% of GDP, effectively rising from $75 billion to $2 trillion in just thirty-five years [6]. The increase in healthcare spending is not only because of increasing advancement of medical technology but also because of other social, political, and medical issues.

Since the mid-20th century, American policymakers, healthcare reformers, and citizens have called for increasing social reforms to healthcare. In 1965, Medicare decided to subsidize healthcare for those over 65 while Medicaid offered benefits to low income citizens who could not afford its services [7]. Due to these reforms and advancements in medical technology among other causes, healthcare spending surpassed the ever-increasing defense spending on the Vietnam War just six years later [8]. Henceforth to provide for these programs, healthcare spending increased at a faster rate to cover all costs. This is not to say reforming the healthcare system to provide for those who cannot afford the services is detrimental but to portray that there are many causes to the rise in healthcare spending. Despite this, medical technology still remains to be an important reason for the rise in healthcare spending.

Cost/Benefit Analysis of Medical Technology in Healthcare

With the rise in healthcare spending comes the costs to both the government and to its citizens. Researchers at the Center for Medicare & Medicaid Services found technological advancement as the leading driver for rising healthcare costs [9]. One reason for this is that research has become a huge portion of this spending. Many medical research firms, especially those who specialize in pharmaceuticals, have come under fire for steep prices and costly spending on research. Researchers from Tufts University found that during the 1990s pharmaceutical drug costs increased from 5.5-8.5% of total healthcare spending [10]. As well, an estimated $111 billion was spent on health research with the pharmaceutical and biotechnology industries the core leaders of research [11]. Health research is vital to society because these researchers devote their time and energy to advancing medical technology such as finding cures to diseases, creating artificial limbs for those without, and producing vaccines. Yet their research undeniably incurs high costs for both the government and its citizens.

On the flip side, where there are costs there are also benefits. Medical technology has resulted in many benefits for both the health and wellbeing of people as well as the healthcare system. The increase in life expectancy has been a huge medical improvement and has been a critical result of medical technology. University of Chicago economists Kevin Murphy and Robert Topel estimated that from 1970-1990 around $57 trillion, or $2.8 trillion per year, has been attributed to the economy due to increases in life expectancy, and the average additional year of life is estimated to be worth $150,000 per person (although this varies with age) [12]. While it may be immoral and/or unethical to put a price on a person’s life, this statistic highlights the importance of medical technology to the health and wellbeing of society and the positive economic effects. Without growth in medical technology, the increase in life expectancy would never have been so great and have contributed so well economically to society.

So why is this important? And why does this matter?

There are a couple of reasons why the economic effects of medical technology are critical to society. Firstly, the increase in life expectancy has increased the ageing population to what it would “naturally” be without modern medicine. Economist Dana Goldman and colleagues created the Future Elderly Model (FEM) to explore and predict future health costs based on the increasing ageing population. Out of three scenarios, the FEM predicts that with the increase in an ageing population healthcare costs will rise [13]. And since medical technology will keep unhealthy people alive longer, total healthcare spending is predicted to be 70% higher than it is today [14].

Furthermore, healthcare has been a core issue in politics for both Democrats and Republicans. Rising healthcare costs has always been a hot topic, but it has been especially relevant in Obama’s two terms as president due to his introduction and implementation of

President Barack Obama signing the ACA into law Photo Credit: Wikimedia
President Barack Obama signing the ACA into law
Photo Credit: Wikimedia

the ACA. The ACA, which opens the doors for battling economic inequality and support universal healthcare, has been rejected by many Republicans. A few months after Obama’s inauguration, Republican senator Chuck Grassley of Iowa presented his legislation to Democrat senator Max Baucus of Wyoming (now U.S. ambassador to China) that would decrease future Medicaid spending, spending on subsidies for the lower-class to purchase affordable insurance, and attack the requirement for individuals to have health insurance [15]. This is the general pattern seen as Democrat leaders often vote for reforms to healthcare while Republican leaders vote for the opposite. No matter what political party you associate yourself with, it is important to know what your party is voting for, whoever you vote for, and what their proposals are, for healthcare and beyond.

Concluding Notes

In conclusion, the economic effects of medical technology vary but are generally positive with some costs. Medical technology has helped economic growth, attributing to increasing percentages of the U.S. GDP. This has also resulted in increasing healthcare costs, especially due to increased drug costs and health research. But medical technology has also benefited overall health and wellbeing such as improving life expectancy and decreasing hospital expenses. And with healthcare costs expected to rise in the future, it is up to you whether you will vote for increased healthcare spending to increase public health and wellbeing or cut healthcare spending to save on costs but prevent possible life-saving technology such as vaccines, pharmaceuticals, and devices from being developed.

Endotes:

[1] “Milestones in Medical Technology.” New York Times, October 10, 2012. http://www.nytimes.com/interactive/2012/10/05/health/digital-doctor.html?_r=2&.

[2] “Technology, Health.” World Health Organization. 2016. Accessed May 07, 2016. http://www.who.int/topics/technology_medical/en/.

[3] “Snapshots: How Changes in Medical Technology Affect Health Care Costs.” The Henry J. Kaiser Family Foundation, March 7, 2007.

[4] Ibid.

[5] Gustav Ranis, “Technology and Human Development,” Economic Growth Center – Yale University, no. 1004 (2011): 6.

[6] The Henry J. Kaiser Family Foundation, 2007.

[7] Gary Pecquet. “Medical Technology and the State: Government Intervention in Health Care Turns Useful Technology into a Dangerous Budget Buster.” Foundation for Economic Education, May 01, 2002. https://fee.org/articles/medical-technology-and-the-state/.

[8] Stuart Altman and Robert Blendon. Medical Technology: The Culprit behind Health Care Costs?: Proceedings of the 1977 Sun Valley Forum on National Health. Hyattsville, MD: U.S. Dept. of Health, Education, and Welfare, Public Health Service, Office of Health Research, Statistics, and Technology, National Center for Health Services Research, Health Resources Administration, Bureau of Health Planning, 1979: (25).

[9] “The Costs and Benefits of Medical Innovation.” Medical Innovation in the Changing Healthcare Marketplace: Conference Summary. 3 (2002). http://www.ncbi.nlm.nih.gov/books/NBK220598/.

[10]  J.D. Kleinke., “The Price of Progress: Prescription Drugs In The Health Care Market”. HealthAffairs. 20 (2001). doi 10.1377/hlthaff.20.5.43

[11] The Henry J. Kaiser Family Foundation, 2007.

[12] Medical Innovation in the Changing Healthcare Marketplace: Conference Summary, 2002.

[13] Dana P. Goldman, David M. Cutler, Paul G. Shekelle, Jay Bhattacharya, Baoping Shang, Geoffrey Joyce, Michael D. Hurd, Dawn H. Matsui, Sydne J. Newberry, Constantijn W. A. Panis, Michael W. Rich, Catherine K. Su, Emmett B. Keeler, Darius Lakdawalla, Matthew E. Chernew, Feng Pan, Eduardo Ortiz, Robert H. Brook, Alan M. Garber, and Shannon Rhodes. Modeling the Health and Medical Care Spending of the Future Elderly. Santa Monica, CA: RAND Corporation, 2008: 2.

[14] Ibid, 4.

[15]  Lawrence R. Jacobs, and Theda Skocpol. Health Care Reform and American Politics: What Everyone Needs to Know. 3rd ed. New York: Oxford University Press, 2010, 86.

Further Readings:

Grabowski, H., J. Vernon, and J.A. DiMasi. 2002. “Returns on Research and Development for 1990s New Drug Introductions.” Pharmacoeconomics 20, no. 15: 11-29. Academic Search Premier, EBSCOhost (accessed March 17, 2016).

Harris, Seymour Edwin. The Economics of American Medicine. London: Collier-Macmillan, 1964.

Howell, Joel D. Technology in the Hospital: Transforming Patient Care in the Early Twentieth Century. Baltimore: Johns Hopkins University Press, 1995.