The Relationship between Technology and Medical Costs

Don Boudreaux, professor of economics at George Mason University, points out in his blog that the medical industry is the only industry that becomes more expensive with innovation and research. Have you ever wondered why that is?

One often-heard explanation for rising medical-care costs centers on the advance of technology. I’m sure that there are variations on this theme, but fundamentally it sounds like this: technological advances improve medical-care treatments but are quite expensive; this technology must be paid for, so at least part of the higher prices for medical care is a reflection of technological improvements in medical care.

Perhaps this explanation is correct; I have no data to contradict it. But my priors make me skeptical of this explanation. Technology creates great improvements in telecommunications and computing, yet the prices of wonders such as cell phones, telephone calls, and personal computers have fallen dramatically over the years.

The same is true for transportation. Huge investments in transportation technology — engine design, the construction of container-shipping facilities, airplane engineering, and on and on and on — are all, both individually and taken together, quite expensive. Yet the price of moving a ton of freight from New York to London, or a half-ton of family members from home to the regional shopping mall, has fallen continually.

Why should medical care be different? It must be the case that some other factor is at work driving up the cost of medical care – a factor that either works in tandem with technological improvements to raise these costs or that works independently of technological improvements to raise these costs.

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