Technological Change and the Growth of Health Care Spending

For nearly all of the past four decades, spending on health care in the United States grew more rapidly than the economy. As a result, the share of national income devoted to health care nearly tripled. This ongoing spending growth pervaded all parts of the health system—including the nation’s public insurance programs.

Although many factors contributed to that growth, most analysts have concluded that the bulk of the long-term rise resulted from the health care system’s use of new medical services that were made possible by technological advances, or what some analysts term the "increased capabilities of medicine." Major advances in medical science have allowed health care providers to diagnose and treat illness in ways that were previously impossible. Many new services are very costly; others are relatively inexpensive but raise aggregate costs quickly as ever-growing numbers of patients use them. Technological innovation can theoretically reduce costs and, for many types of goods and services, often does. Historically, however, the nature of technological advances in medicine and the changes in clinical practice that followed them have tended to raise spending.

Direct measurement of the impact of technological change on health care spending is difficult. The Congressional Budget Office (CBO), on the basis of a review of the economic literature, concludes that about half of all growth in health care spending in the past several decades was associated with changes in medical care made possible by advances in technology. The factors that account for most of the rest of the growth include rising income and changes in insurance coverage, which increased demand for medical care, as well as rising prices in the health care sector.

Many of the same forces affect both federal and private spending on health care. The growth in federal spending for Medicare and Medicaid that would result from a continuation of these trends constitutes the principal challenge of fiscal policy over the long term. Higher federal spending in the coming decades will result partly from the larger number of Medicare beneficiaries as the leading edge of the baby-boom generation turns 65 starting in 2010. In terms of magnitude, however, future growth in spending per beneficiary will be much more important in determining future spending. If spending per beneficiary is allowed to grow as projected under current law, future budget deficits will rise to levels that could severely jeopardize long-term economic growth unless policymakers sharply reduce other projected spending, substantially increase revenues as a share of gross domestic product (GDP), or do some of both.¹

The effects of rising costs are not limited to public programs. For workers with employment-based coverage, the rising cost of health benefits can limit the growth of cash earnings. For people who lack group coverage and are not eligible for public programs, higher per capita health care spending can make individual private coverage prohibitively expensive.

Technological advances are likely to yield new, desirable medical services in the future, fueling further spending growth and imposing difficult choices between spending on health care and spending on other priorities. If the health care system adopts new services rapidly and applies them broadly in the future—as it has tended to do in the past—then large increases in health care spending are likely to continue. If new or existing costly services are used more selectively in the future, smaller increases in health care spending are possible. Because spending growth will depend largely on how the health care system responds to future technological changes, policymakers seeking to limit future cost growth may be particularly interested in the way in which new technologies are incorporated into common practice.

The health care system’s rapid adoption of emerging medical technologies has, in many instances, provided enormous clinical benefits, such as prolonged life and improved quality of life. However, the added clinical benefits of new medical services are not always weighed against the added costs before those services enter common clinical practice. Newer, more expensive diagnostic or therapeutic services are sometimes used in cases in which older, cheaper alternatives could offer comparable outcomes for patients. And expensive services that are known to be highly effective in some patients are occasionally used for other patients for whom clinical benefits have not been rigorously demonstrated.

These findings suggest that some medical services could be used more selectively without a substantial loss in clinical value. Research on comparative effectiveness could provide a basis for applying costly new technologies only when they are likely to confer added benefits that are significantly greater than the benefits conferred by less expensive technologies. If placing greater emphasis on providing evidence-based care (encouraged, for example, by appropriate financial incentives for providers and consumers) resulted in the more selective use of some costly services, future spending levels would probably be lower than they would otherwise be—perhaps substantially so. Attaining significant cost savings, however, may require difficult changes to the ways in which providers and patients make decisions concerning medical care.

Spending on health care services in the United States has grown substantially over the past 40 years (see Figure 1). In 1965, that spending amounted to $187 billion (in 2005 dollars). It more than tripled in real (inflation-adjusted) terms over 20 years, reaching $666 billion in 1985. Over the next 20 years, spending nearly tripled again, reaching roughly $1.9 trillion in 2005.

Source: Congressional Budget Office based on data on spending on health services and supplies, as defined in the national health expenditure accounts, maintained by the Centers for Medicare and Medicaid Services.

Note: Spending amounts are adjusted for inflation using the gross domestic product implicit price deflator from the Bureau of Economic Analysis.

Spending has also risen rapidly on a per capita basis, with growth averaging around 4.9 percent per year in real terms over the past four decades. By contrast, per capita GDP grew, on average, by only 2.1 percent per year during that period. As a result, health care spending now accounts for a much larger proportion of GDP—nearly 15 percent in 2005 compared with 5 percent in 1965.

Although the growth of health care spending has been continual, the pattern of growth in the mid- to late 1990s differed from that of previous decades (see Figure 2). From 1965 to 1990, annual growth in real per capita spending averaged about 5.5 percent. Despite brief periods of relatively slow growth during that time (for example, 2.4 percent from 1972 to 1974 and 3.2 percent from 1977 to 1979), growth rates never remained low for a sustained period. That pattern changed in the 1990s; from 1994 to 1999, annual growth never exceeded 2.8 percent. Notably, that period of relatively slow growth in health care spending coincided with sustained and relatively rapid overall economic growth, and the share of GDP devoted to health care during those six years remained virtually unchanged (see Figure 3). Since then, however, a combination of slower economic growth and accelerated spending on health care has led to a sharp increase in health care spending as a share of GDP—from 12.5 percent in 1999 to 14.5 percent in 2005.

Note: Spending amounts are adjusted for inflation using the gross domestic product implicit price deflator from the Bureau of Economic Analysis.

The data represent compound moving averages. For example, for the five-year moving average series, the 1990 figure represents the average annual growth from 1987 to 1992; for the ten-year moving average series, the 1990 figure represents average annual growth from 1985 to 1995.

Note: Spending amounts are adjusted for inflation using the gross domestic product implicit price deflator from the Bureau of Economic Analysis.

The United States spends more on health care per person than do other industrialized countries. Data from the Organisation for Economic Co-operation and Development (OECD) show that per capita health care spending in the United States in 2005 was nearly twice that in France, Canada, and Germany and roughly two-and-a-half times that in the United Kingdom, Italy, and Japan (see Table 1). The United States also devotes a far greater share of GDP to health care than do many other industrialized nations, even though national income per capita is substantially higher in the United States than in most other OECD countries.

	Per Capita				Average Real Annual Growth (Percent)
	(2005 dollars)		As a Percentage of GDP		1975 to 1985	1985 to 1995		1995 to 2005


United States^a	6,401		15.3		4.9	4.2		3.7

Luxembourg	5,563		7.9		3.9	4.9		8.4
Norway	4,364		9.1		4.6	3.8		6.6
Switzerland	4,177		11.6		2.3	2.5		2.9
Austria	3,519		10.2		1.5	6.0		2.5
Iceland	3,443		9.5		5.4	1.7		4.3
Belgium	3,389		10.3		4.1	3.4		4.3
France	3,374		11.1		4.2	3.6		3.0
Canada	3,326		9.8		3.5	1.8		2.9
Germany	3,287		10.7		2.8	1.7		2.0
Australia	3,218	^b	9.5	^b	1.5	2.3		4.8	^c
Netherlands	3,183	^b	9.2	^b	1.4	3.1		4.1	^c
Denmark	3,108		9.1		2.2	0.9		3.3
Sweden	2,918		9.1		2.5	0		3.3
United Kingdom	2,724		8.3		2.4	3.6		4.9
Italy^d	2,532		8.9		n.a.	1.3	^e	2.9
Japan	2,426	^b	8.0	^b	4.5	2.6		2.9	^c

Source: Congressional Budget Office based on data from the Organisation for Economic Co-operation and Development.

Notes: Spending amounts are adjusted for inflation using the gross domestic product implicit price deflator from the Bureau of Economic Analysis.

The United States is clearly an outlier in its high level of per capita spending on health care, but other countries have also experienced a high rate of growth in such spending. Although growth rates vary by country and by period, most industrialized countries—even those with a financing system quite different from that in the United States—have experienced a substantial long-term rise in real spending on health care. In fact, growth rates in per capita spending in some countries have exceeded those in the United States during some periods.

Although total spending on health care rose in real terms each year during the 1965–2005 period, growth rates varied substantially among different categories of health services and supplies identified in the national health expenditure accounts (see Figure 4). Those categories include hospital care, physician and clinical services, prescription drugs, nursing home care, home health care, other professional services, and administrative costs.² With the exception of one small category (home health care for a short period), each category has shown steady growth in real spending throughout the 40-year period.³

Note: Spending amounts are adjusted for inflation using the gross domestic product implicit price deflator from the Bureau of Economic Analysis.

Hospital Care and Physician and Clinical Services. Growth in overall spending is especially sensitive to changes in the rate of growth in spending for hospital and physicians’ care because they are the largest categories. Accordingly, most of the long-term growth in total health care spending has resulted from growth in either or both of those categories. Similarly, when spending growth has been relatively slow, it has mainly been the result of slower growth in one or both of those categories. The major slowdown in overall health care spending in the mid- to late 1990s, for example, was almost entirely attributable to slower growth in those two categories.

Prescription Drugs. For much of the past 40 years, spending on prescription drugs contributed only modestly to overall spending growth. The growth of spending on prescription drugs accelerated sharply around 1980, but its relatively small share of total spending at that time limited its effect on total spending. Since the mid-1990s, however, spending on prescription drugs has been a much more prominent component of growth in total spending. From 1995 to 2005, it grew by an average of about 10 percent per year.

Costs of Administering Public and Private Insurance. One notable change is the recent jump in spending for the administration of health insurance (see Figure 4). Growth rates for administrative costs have varied substantially over time, but this category was not a major contributor to overall spending until the late 1990s. From 1995 to 2005, spending on administrative services grew by about 7 percent per year.

Other Categories. Spending on nursing home care, other professional services, and home health care has had highly variable rates of growth, but they have not been major contributors to overall growth.

Total spending on health care has nearly tripled as a share of GDP over the past 40 years, reaching almost 15 percent in 2005. In the absence of an unprecedented change in the long-term trend, health care spending will continue to grow as a share of GDP over the coming decades. According to CBO’s projections, which are intended to reflect current federal law, the share of GDP devoted to health care will rise to 31 percent by 2035, 41 percent by 2060, and 49 percent by 2082 (see Figure 5).

Note: Amounts for Medicare are net of beneficiaries’ premiums. Amounts for Medicaid are federal spending only.

Federal spending on Medicare and Medicaid is also projected to grow as a share of total spending on health care. Federal spending on those programs (net of beneficiaries’ premiums) now accounts for about 4 percent of GDP. According to CBO’s current-law projections, those figures will grow to 9 percent of GDP by 2035 and to 19 percent of GDP by 2082. Growth in per capita health care spending is the main factor underlying the projected increase in both national health care spending and federal spending on Medicare and Medicaid. The projected change in the age composition of the population, by itself, has only a modest effect on future health care spending.

CBO’s projections of future spending on health care assume that current federal laws affecting Medicare or Medicaid do not change.⁴ Those laws have been altered significantly in the past and are almost certain to be further modified in the future. CBO’s current-law projections should therefore not be viewed as predictions of future health care spending but rather as illustrations of the fiscal consequences of existing policies. CBO’s estimates are also subject to the inherent uncertainty surrounding any projection of future growth in health care spending, but they provide a useful basis for evaluating possible changes to policy.

From 1965 to 2005, real health care expenditures per capita increased nearly sixfold in the United States. That large increase was the combined result of many factors, and accounting precisely for all of them is difficult. Nonetheless, the general consensus among health economists is that growth in real health care spending was principally the result of the emergence of new medical technologies and services and their adoption and widespread diffusion by the U.S. health care system.⁵

Directly measuring the effects of advancing technology on total spending on health care is extremely difficult, for several reasons. One reason is the sheer complexity of medical science and its unusually rapid pace of change. Also, technological change occurs simultaneously with changes in other factors that affect health care spending, such as personal income and third-party payment. And those factors themselves influence the pace of technological development, making it difficult to identify exactly how technological change itself affects spending growth.

One way to examine how a specific technological development—and the associated changes in clinical practice—affected spending on specific types of patients is to use a case-study approach. That approach, however, does not allow a comprehensive analysis of how total spending on health care changes with advances in technology.

Another way to approximate the effect of technological change is to do so indirectly, using the "residual" method. Certain demographic and economic factors, such as the aging of the population and rising personal income, are determinants of health care spending; using estimates of the relationships between those factors and spending levels, analysts can estimate how changes in those factors contributed to changes in spending, assuming no changes in medical technology. After accounting for the contributions of as many measurable factors as possible, analysts attribute the unexplained portion of spending growth, or the residual, to technological change and the changes in clinical practice associated with it. This approach yields findings that can be sensitive to assumptions concerning the effects of the various factors. In addition, studies using this approach generally do not account for dynamic interactions between growth of personal income, health insurance coverage, and technology development. Nonetheless, this approach can yield a reasonable approximation of how technological change relates to long-term growth in total health care spending.⁶

Breaking down the long-term growth in spending into its various components leaves much of the increase unaccounted for by measurable factors such as the aging of the population or rising personal income. Table 2 shows estimates from three studies of the contributions of selected factors to the long-term growth of health care spending in the United States. Overall, those factors appear to account for no more than half of that growth. Analysts generally attribute the rest of the growth to increases in the technology-related changes in medical practice.

	Smith, Heffler, and
	Freeland (2000)	Cutler (1995)	Newhouse (1992)


Aging of the Population	2	2	2^a
Changes in Third-Party Payment	10	13	10^b
Personal Income Growth	11–18	5	<23
Prices in the Health Care Sector	11–22	19	*
Administrative Costs	3–10	13	*
Defensive Medicine and Supplier-Induced Demand	0	*	0

Technology-Related Changes in Medical Practice (Residual)	38–62	49	>65

Sources: Congressional Budget Office based on Sheila D. Smith, Stephen K. Heffler, and Mark S. Freeland, "The Impact of Technological Change on Health Care Cost Increases: An Evaluation of the Literature" (working paper, 2000); David M. Cutler, "Technology, Health Costs, and the NIH" (paper prepared for the National Institutes of Health Economics Roundtable on Biomedical Research, September 1995); and Joseph P. Newhouse, "Medical Care Costs: How Much Welfare Loss?" Journal of Economic Perspectives, vol. 6, no. 3 (Summer 1992), pp. 3–22.

Notes: Amounts in the table represent the estimated percentage share of long-term growth that each factor accounts for.

Aging of the Population. Although elderly people generally incur higher costs for health care than younger people and much of the spending on health care goes toward treating the elderly, the contribution of an aging population to the growth in that spending over the long term is smaller than is commonly perceived. The elderly fraction of the population grew during the past four decades, but the growth was too gradual and insubstantial to account for much of the increase in per capita spending. Increased longevity raises average per capita spending, but that effect appears to be modest.⁷ CBO estimates that changes in the age distribution from 1965 to 2005, if unaccompanied by changes in other factors affecting health care spending, would have increased total spending by roughly 16 percent, or about 3 percent of the cumulative increase that occurred during that period. Other estimates are generally consistent with this finding (see Table 2).

Another population factor—the rising share of the population who are overweight or obese—has also probably contributed to the growth in health care spending. (See Box 1 for a discussion of obesity and its effect on spending growth.)

The fraction of Americans who are overweight or obese has increased in recent years. Obesity raises an individual’s risk of serious illnesses such as cardiovascular disease and diabetes, and obese people incur greater health care costs. In 2001, for example, spending for health care per person of normal weight was $2,783, compared with $3,737 per obese person and $4,725 per morbidly obese person (in 2001 dollars; see the table below). A rise in the prevalence of obesity is therefore a likely contributor to the growth of health care spending.

One method for estimating that contribution is to ask how much spending on health care would have risen if the prevalence of obesity was the only factor that changed over time. If health care spending per capita remained at 1987 levels for each category of body weight but the prevalence of obesity changed to reflect the 2001 distribution, health care spending would have risen by only 1.4 percent per capita on average. Because actual spending per capita rose by 34.6 percent, this estimate would imply that the change in the prevalence of obesity could account for about 4 percent of all spending growth from 1987 to 2001. (Note that "prevalence of obesity" here refers to changes in the fraction of people in all categories of body weight, including those who are underweight. The fraction of underweight people—who incur costs that are slightly higher than those of people of normal weight—actually fell during this period.)

Another way to examine the effect of obesity on spending is to ask how much would be saved if the prevalence of obesity returned to that of 1987, given the 2001 levels of spending for each respective category of body weight. That approach implies that changes in the prevalence of obesity account for around 12 percent of the spending growth between 1987 and 2001. The different results generated by the two methods reflect the change in the relative magnitude of spending on obese people compared with spending on people of normal weight. In 1987, spending per morbidly obese person was about 18 percent higher than spending per person of normal weight, but by 2001 it was 70 percent higher.

Distribution of Population Aged 19 or Older and
Health Care Spending by Weight Category

	1987		2001
		Spending		Spending
	Percentage of	Per Capita	Percentage of	Per Capita
	Population	(2001 Dollars)	Population	(2001 Dollars)


All People	100.0	2,352	100.0	3,166

Underweight	3.6	2,695	1.8	3,092
Normal	51.6	2,259	38.6	2,783
Overweight	31.4	2,322	35.8	3,103
Obese	12.2	2,655	20.7	3,737
Morbidly Obese	1.3	2,674	3.1	4,725

Source: Congressional Budget Office analysis using the National Medical Expenditure Survey (1987 data) and the Medical Expenditure Panel Survey (2001 data).

Note: Weight categories are defined using the body-mass index (BMI)—a measure of body fat based on height and weight that applies to adult men and women—as follows: underweight (BMI is less than or equal to 18.5); normal (greater than 18.5 and less than 25); overweight (greater than or equal to 25 and less than 30); obese (greater than or equal to 30 and less than 40); and morbidly obese (greater than or equal to 40).

Changes in Third-Party Payment. More generous third-party payment—from the creation of Medicare and Medicaid and subsequent changes to these programs, for example—effectively reduced the average out-of-pocket cost of health care over the past several decades, leading to higher health care expenditures. As a share of all per capita spending on personal health care, consumers’ out-of-pocket costs have fallen sharply, from 52 percent in 1965 to 15 percent in 2005 (see Figure 6). Empirical analyses suggest that under an assumption of no change in medical technology, the expansion of insurance coverage can account for 10 percent to 13 percent of the long-term rise in health care spending (see Table 2). That expansion, in turn, could have had a larger effect on spending by hastening the adoption of cost-increasing new technologies.⁸

Source: Congressional Budget Office based on data on spending on personal health care, as defined in the national health expenditure accounts, maintained by the Centers for Medicare and Medicaid Services.

The effect of health insurance on health care spending is complex. First, expanded third-party coverage fosters greater spending at any point by insulating consumers from part of the cost of medical services, thus encourag-ing them to consume more services than they otherwise would. That increased demand for services, in turn, contributes to rising health care costs, which further increase consumers’ demand for third-party coverage.

Second, health insurance also affects spending through its influence on the development of new technologies over time. Broader access to health insurance coverage, as well as the greater generosity of health insurance plans on average, allows larger financial returns to investment in new medical technologies because both factors contribute to demand for new medical services. Accordingly, a falling share of out-of-pocket health care spending should hasten the development of new technologies, which can lead to higher spending overall.

Rising Personal Income. Economists agree that rising personal income leads to higher spending on health care. Because medical care is a desired service, people naturally demand more of it as their income rises; other things being equal, rising income will lead to an increase in the quantity of medical care demanded and therefore higher total spending. (A relatively high per capita income in the United States, for example, is often cited by economists as explaining a large part of the difference in per capita health spending between the United States and other developed nations.)

There is some uncertainty about how responsive health care spending is to changes in income, however, so reasonable estimates of the contribution of rising income cover a fairly wide range.⁹ Published estimates suggest that growth in average income per capita could account for anywhere from 5 percent to approximately 20 percent of long-term spending growth.

Prices in the Health Care Sector. Some analysts suggest that a rise in the prices of medical goods and services relative to prices outside the health care sector is a source of growth in real per capita spending, although the magnitude of its contribution is highly uncertain. Available estimates suggest that rising prices in the health care sector can account for at most about one-fifth of the long-term real increase in health care spending.

Measuring the impact of price changes on spending for health care presents particularly difficult methodological challenges because many of the available measures of price changes are misleading. For example, the average cost of a day in the hospital has risen dramatically, and many commonly prescribed drug products are far more expensive than their counterparts from past decades. These figures do not provide a meaningful illustration of price changes, however, because they obscure vast improvements in the value and quality of care. The medical care component of the consumer price index may not account sufficiently for changes in the quality of medical services over time.

If productivity growth in the health care sector is slower than that in other sectors of the economy, then the price of medical care may rise relative to the overall price level. Such an increase is especially likely if the demand for medical care is relatively insensitive to changes in price, as most analysts believe it is. In certain parts of the health care sector, productivity gains are relatively hard to achieve; examples include nursing home-related services or basic care delivery. Rising prices may therefore have contributed to higher real spending for these needed services. Other parts of the health care sector, however, have probably experienced rapid productivity growth, which may have lowered prices, so it is difficult to say how productivity and prices have changed for the health care sector as a whole. The estimates of the contribution of price changes to real spending growth shown in Table 2 reflect assumptions of relatively slow growth in productivity in the health care sector and therefore may overstate the contribution of prices in that sector to long-term spending growth.

Administrative Costs. Estimating the contribution of changing administrative costs to growth in overall health care spending is complicated, for several reasons. First, reliable, comprehensive data are difficult to find.¹⁰ The national health expenditure accounts provide data on the costs of administering government health programs and on net spending on private insurance policies (revenues from premiums minus medical payments).¹¹ These data, however, omit clerical work performed by providers or their staff.

Even if reliable comprehensive data were available, they would be difficult to interpret because certain types of administrative activity probably help reduce health care spending, making the net effect on total cost growth unclear. More intensive review of the use of medical services for clinical appropriateness, for example, may help deter the provision of costly services that confer little clinical value. The largest estimate shown in Table 2—13 percent of aggregate cost growth—reflects an attempt to gauge the maximum possible impact that administrative costs could have had on long-term spending growth. Other estimates range from 3 percent to 10 percent.

Defensive Medicine and Supplier-Induced Demand. "Defensive medicine" refers to services that have little or no clinical value but that physicians order or perform at least partly to avoid lawsuits. Although this type of practice is often cited as a factor underlying rising health care costs, most empirical analyses conclude that its contribution to the long-term growth of health care spending has been negligible (see Table 2).

The costs imposed by defensive medicine are difficult to measure. One reason is that estimates of the extent of that practice often rely on conjectural surveys of providers, and what one provider may consider to be defensive medicine may be deemed prudent medicine by another.¹²

Some analysts have suggested that changes in medical malpractice law, such as limits on noneconomic damages, could reduce the practice of defensive medicine and thereby lower health care spending by reducing the use of medical services. Several states have imposed various types of tort limits. A recent CBO analysis examined whether those state policies affected health care spending. Although CBO found some links between tort limits and health care spending in those states, the results were inconsistent and sensitive to the specifications of the model.¹³ Overall, there is little reliable evidence suggesting that defensive medicine is a major cause of increasing medical care costs. (In contrast, perceptions of malpractice liabilities may cause physicians to be more sensitive to the practice norms in their local areas than would otherwise be the case. And variations in those norms may contribute to the significant regional variation observed in the level of health care costs across the United States. That variation will be explored in a forthcoming CBO study.)

Providers who are paid on a fee-for-service basis are able to affect their own income by exerting influence over the volume of services they provide. Physicians may respond to fee reductions, for example, by increasing their supply of services to offset some of the lost revenue—a practice referred to as supplier-induced demand.¹⁴ Many economists believe that induced demand affects health care spending, but there is no consensus on the magnitude of the effect. Even if induced demand accounted for a substantial part of the level of health care spending at any point in time, analyses of long-term spending growth have not found it to be a large factor. In a recent CBO analysis that examined the sources of growth in Medicare spending on physicians’ services from 1997 to 2005, physicians’ behavioral responses to changes in fees were found to account for only a small part of that growth.¹⁵

On the basis of a review of the economic literature, CBO concludes that roughly half of the increase in health care spending during the past several decades was associated with the expanded capabilities of medicine brought about by technological advances.

CBO defines technological advances as changes in clinical practice that enhance the ability of providers to diagnose, treat, or prevent health problems. Technological advances take many forms. Examples include new drugs, devices, or services, as well as new clinical applications of existing technologies (providing a particular service to a broader set of patients, for example). Other technological changes are newly developed techniques or additions to knowledge.

Medical breakthroughs occasionally create new types of therapies that enable providers to treat conditions they previously could not treat or could not treat effectively or aggressively. In such cases, new financial costs are incurred where little or no costs had been incurred before. Other advances in knowledge or technical capabilities bring the benefits of existing methods or services to much wider patient populations, increasing spending. Even when technological innovation leads to a decline in the cost of a given service, net spending rises if the use of services increases sufficiently. Innovation can also make older treatments more costly than they would otherwise be.

New curative therapies with one-time costs could reduce spending if they obviated the need for costlier treatments. (See Box 2 for a discussion of possible future advances in medical science that could affect health care spending.) Many advances in medical science, however, do not fall into that category. In fact, many of the most notable medical advances in recent decades involve ongoing treatments for the management of chronic conditions such as diabetes and coronary artery disease.

Advances in medical care can reduce spending in some instances. Some vaccines, for example, may offer the potential for savings, and certain types of preventive medical care may help some patients avoid costly hospitalizations for acute care. But, overall, examples of new treatments for which long-term savings have been clearly demonstrated are few. Many medical advances to date have increased spending because they made treatments available for conditions that were previously impossible to treat or were not aggressively treated. Furthermore, improvements in medical care that decrease mortality by helping patients avoid or survive acute health problems paradoxically increase overall spending on health care because surviving patients live longer and therefore use health services for more years.

Future advances—in molecular biology and genetics, in particular—may one day offer the possibility of savings if they make curative therapies available. Continued advances in understanding the genetic origins of disease offer the credible possibility that future providers will accurately predict the health risks faced by individual patients and design therapies tailored specifically to them. Some therapies may involve the insertion of healthy genes into tissue in order to compensate for damaged or missing genes; others might be aimed at the signaling processes within and between cells that initiate cell growth or metabolic activity. Major illnesses such as cancer, Lou Gehrig’s disease, Huntington’s disease, epilepsy, cystic fibrosis, and glaucoma may be targeted at their genetic origins. Treatment for coronary artery disease may include therapies that target the genes that regulate cholesterol; other therapies may stimulate repairs to damaged heart muscle or new vessel growth for vascular disease. Compared with some existing therapies that manage—often over many years—the effects of chronic disease, new therapies that target the genetic origins of disease may yield savings, but predicting how they would affect spending is very difficult. And most of these therapies are not likely to be a practical reality in the near term.

Note: For a discussion of technological advances and their implications for future medical therapies, see Schwartz, Life Without Disease (1998); Schwartz, "In the Pipeline" (1994); and Potts and Schwartz, "The Impact of the Revolution in Biomedical Research on Life Expectancy by 2050" (2004).

Advances in Medical Technology That Increase Health Care Spending

Advances in medical science during the past several decades have greatly increased the set of available medical services, allowing practitioners to treat patients in ways that were not previously possible. Most health policy analysts agree that the long-term increase in health care spending is principally the result of the health care system’s incorporation of these new services into clinical practice. Although compiling an exhaustive list of technological advances that have affected medical costs is not possible, a qualitative discussion of selected major scientific advances and the changes in clinical practice that followed them can help illustrate how technological progress has been accompanied by more spending.¹⁶

Revascularization for Coronary Artery Disease. In the 1950s and much of the 1