The Lifetime Costs and Benefits of Medical Technology

Featured in print Bulletin on Aging & Health

Over the past fifty years, medical expenditures have increased very rapidly, from 5 percent of GDP in 1960 to 16 percent today. It is widely believed that technological change is the main driver of these expenditure increases, bearing responsibility for at least half of the growth.

While the adoption of a new medical technology results in an immediate increase in medical expenditures, that is only part of the story. What improvements in longevity or quality of life result from the use of the new technology, and how do we put a monetary value on these benefits? While this question is clearly a difficult one, answering it is necessary in order to determine whether the new technology is worth its cost. In addition, how will the use of the new technology today affect medical spending in future years? In theory, the new technology may either raise future spending by extending patients' lives or reduce it by making patients healthier. A full assessment of the cost-effectiveness of a new medical technology will incorporate costs (or cost savings) that occur in the future as well as costs that are incurred today.

In "The Lifetime Costs and Benefits of Medical Care" (NBER Working Paper 13478), David Cutler evaluates the long-term costs and benefits of one specific medical technology. The technology he examines is therapeutic surgical care after a heart attack, or revascularization, a term that encompasses both bypass surgery and angioplasty. These are relatively common and expensive medical treatments whose value has been a matter of debate in the literature.

One significant challenge in estimating the costs and benefits of revascularization is that those who receive the treatment are unlikely to be a random subset of all patients who experience heart attacks. The sickest patients may be too weak to withstand the treatment, while the healthiest patients may not need it. As a result, the sample of treated patients could be healthier or less healthy on average than the sample of untreated patients, and any differences in health outcomes or subsequent medical costs of the two groups may reflect underlying differences in their health rather than the effect of revascularization per se.

The author's solution to this problem is to use the "differential distance"-that is, the difference between the distance to the nearest revascularization hospital and the distance to the nearest hospital of any type-to predict the probability that each patient will receive revascularization, and then to use the predicted probability of treatment rather than actual treatment status in the analysis. The predicted probability will be related to actual treatment status but unrelated to the patient's unobservable health status, and thus not subject to the concern raised above.

The data for the analysis are the Medicare claims records for a sample of 125,000 beneficiaries who were admitted to a hospital with a heart attack in 1986-1988. The data includes information on the beneficiaries' medical costs and survival outcomes for a 17-year period following their heart attack, long enough to ensure that virtually all of them will have died during the period.

The author first verifies that his differential distance measure is related to actual treatment status. It is: people who live closer to a revascularization hospital (have a differential distance below the median) are 3 percentage points more likely to be revascularized than people who live further from such a hospital (have a differential distance above the median).

Next, the author employs the strategy described above to estimate the effect of revascularization on survival and medical expenditures. He finds that receiving revascularization is associated with an additional 1.1 years of life expectancy, and that the cost of this gain is $38,000. Accordingly, the cost of an additional year of life obtained through revascularization is about $33,000. As the commonly accepted value of a year of life in good health is $100,000, these results suggest that revascularization is highly cost-effective.

The benefits of revascularization could be even larger than what is estimated here, since any improvements in the quality of life have not been incorporated into this calculation. On the other hand, the additional year of life gained from revascularization might be of less than good quality, due to the age and health of beneficiaries, so $100,000 may not be the appropriate benchmark for the cost-effectiveness assessment.

One unresolved issue in the interpretation of these results is whether the benefits flow from the revascularization procedure per se, or from the receipt of other services associated with being admitted to a hospital with revascularization capacity. For example, hospitals that offer revascularization may also have better cancer care, and once a patient receives treatment at a particular hospital for a heart attack he may return to receive treatment for his other health conditions. If this is the case, the benefits of revascularization will be lower than what has been estimated, but so will the costs, so it is likely that revascularization will remain a highly cost-effective procedure. The author concludes "separating the impact of high tech care from other care is a topic worthy of future research."

The author gratefully acknowledges financial support from the National Institutes on Aging.