DIPLOMA OF HEALTHCARE

MANAGEMENT

DHM 2133
HEALTH ECONOMICS

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 DHM 2133
Lecture by: LALITA
ANBARASEN

CHAPTER 7: Technology
Transfer in Health Care
TECHNOLOGY IN HEALTH CARE

Health economists and policy analysts are particularly interested in the role of technological
change in health care because of the need to assess both its benefits and its impact on the rising
costs of health care.

Advances in health care in the second half of the twentieth century raised expectations about
attainable levels of health and therefore increased the demand for technologically sophisticated
health care.

The increase in the efficacy of health care and the resulting increase in the cost of health care
further increased the demand for health insurance.

Considerably less than half of the increase over time in the price of health care can be explained
by the combination of increased insurance coverage, increasing real income, supplier-induced
demand, changing demographic characteristics of the population, or the labor-intensive
character of health care.
TECHNOLOGICAL CHANGE

Promotion of Innovation

Technological advances take place through the process of innovation. Innovation, which may be
integrated with the process of discovery or invention, includes developing and marketing new
products.

Schumpeter viewed innovation as the driving force in a market economy. He called the process
by which one product or process is replaced by a better one “creative destruction.”

Such factors as professional prestige and the satisfaction derived from helping cure diseases may
also be important stimuli in the process of innovation, as is government funding to support basic
research.

Demand for products and the expectation of profits are needed for innovation to occur.
Intellectual Property Rights

Another factor that is believed to promote innovation is patent protection for intellectual
property rights. Patents are permits that grant exclusive ownership rights over processes or
products for a specified length of time.

Without patent protection, innovations would be greatly slowed unless governments were to
fund product development, as well as basic research processes. The incentive to innovate would
be reduced because duplication makes research and development (R&D) activity less profitable.
The problem of imitation is particularly serious in the pharmaceutical industry where
development costs are very large compared to production costs. The cost of producing the drugs
is minimal compared to the extensive testing to gain governmental approval to market and sell
them
TECHNOLOGICAL DIFFUSION

The United States ranks highly in the diffusion of most medical technologies. A study comparing
this country with two other countries known for excellent health care, Canada and Germany,
illustrates this (Rublee, 1994).

The United States ranked highest in the diffusion of all technologies studied. The advantages
were particularly large in the case of magnetic resonance imaging (MRI) and radiation therapy.

Both of these technologies require very high levels of both physical and human capital
investment.

These examples illustrate the fact that use of advanced technologies requires complementary
support in the form of well-equipped treatment centers and medical personnel with the
specialized training to perform the procedures.
Cost Increasing Versus Cost Saving Innovations

A cost-increasing innovation in medicine is an innovation that increases the cost of treatment for
a particular disease. Where there is no incentive to contain costs, it may be more profitable for
firms to develop more expensive or cost-increasing technologies.

An example of a cost-increasing innovation is laparoscopic cholecystectomy surgery to remove

the gallbladder using a small inserted camera to direct the surgeon’s instruments. It is
particularly notable because of the rapid diffusion of this technique after it became available in
the United States in the 1980s.

By 1992, 80 percent of the cholecystectomies performed in this country were laparoscopic. The
technique is more frequently used in the early stages of the disease among younger, non-
Medicaid patients, but it has also come to be widely used among the elderly, including the very
elderly for whom it is also appropriate and effective (Walling et al., 1999).
The new technique has been shown to cut mortality rates in half for all age groups. Among the
elderly, it has also greatly reduced the need for stays in skilled nursing homes. It has shortened
average recovery time.

Patients are also able to return to work in an average of 15 days as opposed to 31 days, and
hospital stays have been reduced from 4.3 to 1.6 days (Johnson-Lans, 2004).

Even if the increase in the need for gallbladder surgery had not accompanied the development
of the laparoscopic technique, the innovation defined narrowly, is more expensive.

Even though hospital stays are shorter, total surgeon and hospital charges are higher for
laparoscopic surgery than for open surgery and they outbalance savings in hospitalization costs.
Certain stages in the development of medical treatments may tend to involve initially higher
costs followed by lower costs.

For example, compare the early treatments for polio mellitus, a disease that was life-threatening
well into the 1950s in high-income countries.

The iron lung was an expensive machine that kept the paralyzed alive, but required intensive
care. Contrast this with the second-generation innovation, the Salk and Sabine vaccines, which
prevented the disease and were inexpensive and noninvasive.

Here, the development of vaccines replaces expensive combinations of machinery and drugs
Thank you