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Medical technology, broadly defined as the products and services patients receive when treated, is the engine behind increases in medical spending. Newhouse (1992) concludes that approximately two-thirds of the growth in medical costs in the United States between 1950 and 1987 was due to changing medical technolo- gies.1 There is also evidence that medical care in the US has improved substan- tially over the past 30 years for certain health conditions such as cardiovascular disease. For example, the life expectancy of a 45-year old today is 4.4 years longer than it was in 1950 (Cutler (2004)).2 Murphy and Topel (2006) estimate that the total rise in life expectancy in the US between 1970 and 2000 increased national wealth by $3.2 trillion per year, which is approximately equal in value to one-half of GDP.

An important policy issue, therefore, is whether the value of new medical tech- nology exceeds its cost. More generally, if new technologies are priced higher than the technologies they replace and consumers value the superior health outcomes that can now be produced, are medical prices rising or falling once one correctly controls for quality? If the government and private health insurers believe new medical technologies are causing quality-adjusted prices to increase, on average, they may make it more difficult for new products to reach the market and/or reduce payment for new products, which would dampen the financial incentives

1Newhouse estimates the proportion of the growth in medical spending accounted for by the aging of the population, improved health insurance based upon the RAND health insurance experiment price elasticity, and rising income based on the RAND income elasticity. Medical technology is the residual once the factors above have been accounted for. Finkelstein (2007) argues that the aggregate, market-wide e ects of health insurance on spending are larger than those derived from individual choices in the RAND experiment. She estimates that about one-half of the growth in US hospital spending between 1950 and 1990 was due to the spread of health insurance, which may indicate that medical technology accounts for less than one-half of the

growth in medical spending 2Cutler (2004) estimates that two-thirds of this increase was due to changing medical technologies, pri-

marily for the treatment of cardiovascular disease. The remaining one-third was due to behavioral changes.


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