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How Does Technological Change Affect Quality-Adjusted Prices in Health Care? Systematic Evidence from Thousands of Innovations

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Listed:
  • Kristopher J. Hult

    (Charles River Associates)

  • Sonia Jaffe

    (Department of Economics, University of Chicago Author email: spj@uchicago.edu)

  • Tomas J. Philipson

    (Becker Friedman Institute and Irving B. Harris Graduate School of Public Policy Studies, University of Chicago.)

Abstract

Medical innovations have improved treatment for many diseases but have simultaneously raised spending on health care. Many health economists believe that technological change is the major factor driving the growth of the health-care sector. Whether quality has increased as much as spending—that is, whether new innovations raise or lower quality-adjusted prices in health care—is a central question for both positive and normative health-care analysis. We do a systematic analysis of the impact of technological change on quality-adjusted prices, with over 6,000 comparisons between innovations and incumbent technologies. We observe each innovation's price and quality, as well as the price and quality of an incumbent technology treating the same disease. We find that the innovations' quality-adjusted prices are higher than the incumbents' for about two-thirds of innovations. Nevertheless, we argue that quality-adjusted prices may fall or rise over time depending on the effect of competition on incumbents' prices over time. A 4-percent price decline due to competition would offset the cross-sectional price difference for a majority of indications. We discuss the conditions particular to health care that may cause increases in quality-adjusted prices over time rather than decreases as experienced in many other industries.

Suggested Citation

  • Kristopher J. Hult & Sonia Jaffe & Tomas J. Philipson, 2018. "How Does Technological Change Affect Quality-Adjusted Prices in Health Care? Systematic Evidence from Thousands of Innovations," American Journal of Health Economics, University of Chicago Press, vol. 4(4), pages 433-453, Fall.
    • Handle: RePEc:ucp:amjhec:v:4:y:2018:i:4:p:433-453
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    Cited by:

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    2. Ivan Frankovic & Michael Kuhn & Stefan Wrzaczek, 2020. "On the Anatomy of Medical Progress Within an Overlapping Generations Economy," De Economist, Springer, vol. 168(2), pages 215-257, June.
    3. Frankovic, Ivan & Kuhn, Michael, 2023. "Health insurance, endogenous medical progress, health expenditure growth, and welfare," Journal of Health Economics, Elsevier, vol. 87(C).
    4. Karen Eggleston & Brian K. Chen & Chih-Hung Chen & Ying Isabel Chen & Talitha Feenstra & Toshiaki Iizuka & Janet Tin Kei Lam & Gabriel M. Leung & Jui-fen Rachel Lu & Beatriz Rodriguez-Sanchez & Jeroen, 2020. "Are quality-adjusted medical prices declining for chronic disease? Evidence from diabetes care in four health systems," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 21(5), pages 689-702, July.
    5. Seidu Dauda & Abe C. Dunn & Anne E. Hall, 2019. "Are Medical Care Prices Still Declining? A Systematic Examination of Quality-Adjusted Price Index Alternatives for Medical Care," BEA Working Papers 0166, Bureau of Economic Analysis.
    6. Dauda, Seidu & Dunn, Abe & Hall, Anne, 2022. "A systematic examination of quality-adjusted price index alternatives for medical care using claims data," Journal of Health Economics, Elsevier, vol. 85(C).
    7. Abe Dunn & Anne Hall & Seidu Dauda, 2022. "Are Medical Care Prices Still Declining? A Re‐Examination Based on Cost‐Effectiveness Studies," Econometrica, Econometric Society, vol. 90(2), pages 859-886, March.

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    More about this item

    Keywords

    health innovation; quality-adjusted prices;

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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