All Commentary
Wednesday, May 1, 2002

Medical Technology and the State

Government Intervention in Health Care Turns Useful Technology into a Dangerous Budget Buster

So-called public-policy experts often take the many advances in modern technology for granted. They assume that government regulations and controls merely redistribute the fruits of progress without affecting the nature and extent of technological development itself.

But that is wrong. Whenever the government involves itself in the financing and distribution of goods and services, the production of those things will also be affected. Only certain social institutions have proven capable of delivering sustained economic growth. Private ownership of the means of production and free markets provide the necessary environment for entrepreneurial risk-taking and innovation. It is never enough for some government laboratory to develop a new technology. New technologies must prove to be cost-effective in a market context in order to successfully serve the needs of customers over time.

In free markets technological advances tend both to improve the quality and to reduce the costs of goods and services sold to consumers. The histories of the automobile and pocket calculator are typical. First, producers introduce a new product as an expensive luxury item, affordable only to the rich and sought chiefly as a curiosity. Second, competition among businessmen for profits leads them to seek larger markets for the products. Consequently, the producers direct considerable attention to developing cost-reducing innovations (for example, introduction of assembly-line production techniques by Henry Ford and the use of microchips in calculators). Third, entrepreneurs vigorously compete and pass on these cost reductions to consumers through lower prices. Fortunes are made and lost, but the new technologies raise the living standards for everyone.

Advances in medical technology, however, have failed to reduce the cost of health care. The introduction of more and more new medical techniques and equipment only seems to push costs ever upward. Overall health expenditures increased from 5.9 percent to about 14 percent of gross domestic product from 1965 to 2001 and are expected to grow to 16.2 percent of GDP by 2008.1 Some experts have even blamed the new technologies for the cost explosion. Henry Aaron, senior fellow at the Brookings Institution, recently asserted that medical spending continues to rise faster than the GDP because the population is growing and new medical technologies and therapies are constantly being developed to enable more people to receive treatment than previously possible.2

Professor Mark Pauly of the Wharton School of Business stated, “Basically, most of the data I know about indicates that the lion’s share—whatever that is—of the growth in medical spending per capita, even after you adjust for the aging population, is accounted for by what we call technology.”3 For example, before the development of hip-replacement surgery, an arthritic hip was treated with aspirin and a walker. Now a single hip replacement can cost from $20,000 up to $50,000 depending on age and the length of hospital stay.4 Advances in medical equipment also seem to drive medical expenses ever upward. MRI (magnetic resonance imagery) machines involve both heavy capital outlays and additional personnel. The average x-ray costs $80 while a similar MRI machine costs over $1,200 per examination. Unlike x-rays, MRIs can detect brain and muscular disorders.5

Different Method of Payment

The method of payment sets health care apart from most consumer goods. Most goods are purchased directly by the consumers who enjoy them. In contrast, about 85 percent of all health-care expenditures are financed through third parties. The federal and state governments under Medicare and Medicaid pay 44 percent; private insurance companies and other third-party payers pick up 39 percent.6 Medicare subsidizes the health care of those over 65 years old and Medicaid provides free benefits to the poor. Both programs were enacted in 1965. Private insurance is also encouraged under federal law, which exempts employee medical benefits from income taxes. Since the government now spends huge sums on health care, it decides which technologies and procedures will be covered under its programs. Once a procedure makes the list of acceptable (nonexperimental) practices under Medicare, the standard is set for most private insurance plans to follow. The quality of medical cares improves, but the costs increase.

Under government-financed third-party payments, every new technological novelty becomes available to the vast majority of the American public—before the cost-reduction stage can occur. Medical technology entrepreneurs need not reduce costs to broaden their markets! Consequently, entrepreneurs of medical technology focus on newer, even more expensive technological improvements, rather than on applying costs-reduction methods to existing technologies. For example, some new antibiotics may be only 2 percent more efficacious and yet cost 100 percent more. But drugs do not have to be marketed to a cost-conscious public. As long as the new drugs obtain approval under Medicare rules, doctors and patients will avail themselves of the best possible quality—at taxpayer expense.

Normally, technological advances are a benefit to producers and consumers alike. Government financing, however, introduces a third party—the taxpayer—who is bled dry. State governments have attempted to restrict health-care technology by requiring providers to obtain licenses called “Certificates of Need” (CON) from state officials in order to purchase new equipment. CONs supposedly reduce government expenditures by making medical technology less available, just as socialized medicine does in Canada. This approach to cutting medical costs frequently leads to political scandals and long waits. Most important, it does nothing to redirect entrepreneurs toward reducing costs.

Countries with nationalized health care, such as Canada, Germany, and the United Kingdom, spend much less on medical care than the United States (only 7–10 percent of GDP compared to 14 percent in the United States).7 This is not because the government is more cost-effective than health-care markets, but because there is little innovation under a nationalized system. By restricting technological advances and cutting the quality of medical care to the bone, socialized medicine can offer lunchbox medical care to everyone, but even then routine office visits and surgeries often require waiting in long lines. During the ’80s middle-class Canadians began to flock to the United States for treatments.8 Since then, the long lines for Canadian specialists have dramatically increased. The required median waiting time for Canadian patients between referral by a general physician and actual treatment by a specialist increased from 9.3 to 16.2 weeks from 1993 to 2001; and for certain specialists, such as orthopedists and neurosurgeons, the wait has stretched to about six months.9

Under these circumstances, med-tech entrepreneurs need not serve individual patients and doctors. Cost reductions will not be forthcoming under government-financed egalitarian health care. It is no accident that the United States, where health-care financing is only partially socialized, health-care attracts more new investments in medical technology than Canada or Europe, where government-funded health care is complete. In 1990 the state of Washington had more MRI machines than all of Canada, even though Canada’s population of 26 million is more than five-and-a-half times larger than Washington’s population.10

It is also no accident that the proponents of nationalized health care in the United States frequently blame the very creators of new medical technologies (especially the pharmaceutical companies) for the cost overruns inherent under government funding. The all-too-eager national health-care chefs impatiently wait for the proverbial golden goose to be added to their stewpot.

Moral Vision

Beneath every public policy lies both an economic theory and a moral vision. The economic theory on which Medicare and Medicaid are based asserts that third-party payments will not significantly alter the behavior of patients, doctors, and other health-care providers—including med-tech entrepreneurs. In 1965 when Medicare and Medicaid were enacted the federal government paid most medical expenses without questioning the decisions made by doctors and patients. But one cannot be personally responsible without being fiscally responsible: people flocked to receive taxpayer-paid medical care and they tended to opt for the most expensive treatments available.

Medicaid costs quickly got out of hand. Outlays increased by an average 36.6 percent per year from 1967 to 1972, and about two-thirds of this increase came from the sheer numbers of eligible welfare recipients.11

Medicare expenses grew slowly at first because eligibility depends on reaching 65. From 1970 to 1981, the number of Medicare enrollees increased by only 3.1 percent,12 but the cost increases began to soar out of control by the mid-1970s. During the period 1974–1981 the cost increased annually by 19.7 percent, 30.3 percent, 20.3 percent, 21.2 percent, 17.0 percent, 15.6 percent, 20.2 percent, and 21.3 percent.13 A significant portion of these Medicare cost increases came from improvements in the quality of health care due to the introduction of new medical techniques and technologies. Periodically, Medicare has been projected to go bankrupt and politicians have responded by raising taxes and restricting services. By the year 2000, spending on Medicare physician services was growing 5 percent faster than GDP, and the Medicare Board of Trustees expected the program to exhaust its funds by 2023.14

Government-financed health care is not a miracle cure for those who cannot afford treatment: the inevitable consequence of divorcing the consumption of health services from cost considerations leads to bankruptcy and/or Draconian government restrictions and rationing. Under socialized medicine in Britain, Canada, and elsewhere patients die as they wait for treatment. Others cope by receiving antiquated treatment. Expensive kidney dialyses or the latest cancer therapies may be routinely denied to old people. Inevitably, the government must control costs somehow, so it begins to deny modern treatment to the sick and allowing the severely ill and old to die.15

The moral vision that underlies Medicare, Medicaid, and the push toward “universal coverage” over the recent decade is found in the discredited Marxist credo that goods should be “distributed” according to need, rather than exchanged according to “ability to pay.” Government intervention in health care is a poisoned pill marketed under many different brand names: “single payer,” “mandatory co-ops” with “universal coverage,” private insurance under “community rated” pools financed under “employer mandates” (the Clinton plan), Medicare, and Medicaid. Each of these pills contains the same deadly ingredient with only slight differences in the sugar coating. Each relieves patients and doctors of cost consciousness—by design. Each turns technology from everyone’s friend to a dangerous budget buster, which the government must throttle and ration.

The “feel good” credo “from each according to his ability to each according to his need” does not only lead to economic bankruptcy; it generates moral bankruptcy as well. By removing doctors and patients from the cost-awareness loop, people are deprived of personal responsibility. Individuals no longer must choose between alternative methods of treatment based on cost differences. Nor must they face tough decisions such as choosing between selling the house and sacrificing Junior’s college education in order to prolong Granny’s life a few more weeks by using the latest life-support equipment.

Approximately 1 percent of GDP is spent on the dying in their last year of life,16 and about 40 percent of these costs are incurred treating patients during their final 30 days of life.17 However, averages can be deceiving. Only about 3 percent of Medicare patients who die actually incur the exorbitant costs due to aggressive care.18 A comparatively small number of patients are responsible for a lion’s share of the costs of dying.

Terminal medical costs paid by conscious recipients or their loved ones may be well worth the price. But dying patients are sometimes unable to make choices for themselves and are forced to undergo invasive high-tech procedures that merely extend the dying process for a short time. Third-party insurers, including Medicare and Medicaid, expend enormous taxpayer funds to relieve patients and their loved ones from making informed cost-conscious decisions. Already one state, Oregon, has followed the lead of the socialized medical-care nations and adopted health care rationing by denying certain treatments to the old or very sick.19 Do we want to follow this lead?

Choices between one’s wealth and the health of a loved one are often difficult, but a morally responsible life often involves difficult choices. Are we really better people for abdicating them to politicians and bureaucrats? One of the most appealing aspects of socialism to some people is that the government relieves them of the need to make difficult choices. The Soviet system once promised the people that the basic necessities would be provided to all who obeyed. Under government health care the state either provides the most expensive options or else it rations care in a manner that removes all the cost considerations from the relevant parties.

National health insurance damages people because it treats them like children. Government planners decide how much medical technology we should have and who shall receive its benefits. Individuals are discouraged or deprived of the ability to save for their medical emergencies and old-age care. Individuals are denied the opportunity to reduce health-insurance premiums by lifestyle changes. Individuals are even prevented from allocating their own health-care dollars by shopping for an insurance package tailored to their personal needs.

Government-financed medical care may make some people feel better, but is this “feel good” credo a moral principle worth upholding? Esau sold his precious inheritance to Jacob for a bowl of soup. Is a bowl of public health worth giving away the prospects of continued medical improvements for generations to come?

The recent proposals stemming from the 2000 election to expand Medicare to cover prescription drugs only continue the trend toward nationalized health care. We must reverse that trend and begin adopting approaches that restore cost-consciousness to patients and doctors, such as medical savings accounts. Insurance companies should be free to set premiums according to medical risk instead of according to a “community rating,” which ignores differences among the insured.

Only when we become responsible for our own health care will med-tech entrepreneurs compete to reduce medical costs. These cost reductions are needed to make room for wave after wave of still newer medical technologies that will enable us to live longer, healthier lives.

Gary Pecquet is an economist and C.P.A. in the greater New Orleans area.


  1. Steve Eisenberg, medical director of Blue Cross Blue Shield of Minnesota, September 19, 2001, at
  2. Geri Aston, AMNews staff, “Medicare sound for now, but long-term outlook is gloomy,” April 17, 2000, The Newspaper for America’s Physicians, at
  3. “Health Policy Discussion” from “Productivity in Health Care: The Value of Medical Technology,” AEI Conference, February 28, 2001, at
  4. Leigh Hopper, “Hip replacement firm issues recall,” Houston Chronicle, January 23, 2001, at
  5. Mark H. Gurda, “Rising costs, September 18, 2000,” at
  6. Calculated from a report by the Health Care Financing Administration, “Table 3 National Health Expenditures Aggregate and Per Capita Amounts, Percent Distribution and Average Annual Percent Change by Source of Funds: Selected Years 1982–2010.” (Calculations based on the 2000 projection.) See
  7. In 1997 the percentage of GDP spent by these nations on health care was: United States, 13.6 percent; Canada, 9.3 percent; Germany, 10.4 percent; and the United Kingdom, 6.7 percent. (International Health Policy, “Multinational Comparisons of Health Care,”
  8. Jarret B. Wollstein “National Health Insurance: A Medical Disaster,” The Freeman: Ideas on Liberty, October 1992. The article is available online at
  9. Michael Walker and Greg Wilson “Waiting your Turn: Hospital Waiting Lists in Canada,” 11th edition, Fraser Institute, graph at
  10. John C. Goodman and Gerald L. Musgrave, “Twenty Myths about National Health Insurance,” National Center for Policy Analysis, 1991, cited in Wollstein.
  11. John Holahan, Financing Health Care to the Poor (Lexington, Mass.: Lexington Books, 1975), pp. 28–29; cited in Paul B. Ginsburg, “Public Insurance Programs: Medicare and Medicaid,” in H.E. Frech, ed., Health Care in America: The Political Economy of Hospitals and Health Insurance (San Francisco: Pacific Research Institute for Public Policy, 1988), p. 190.
  12. Ginsburg, p. 188.
  13. Ibid., Table 5–1.
  14. Geri Aston, “Medicare sound for now, but long-term outlook is gloomy,” April 17, 2000, The Newspaper for America’s Physicians,
  15. Goodman and Musgrave, pp. 29–31, cited in Wollstein.
  16. Author’s computation. About 30 percent of all Medicare money is spent on those who die in the same year the money is spent. J.D. Lubitz and R. Prioda, “The Use and Costs of Medical Services in the Last Two Years of Life,” Health Care Financing Review 5 (1984), pp. 117–31.
  17. J.D. Lubitz and G.F. Riley, “Trends in Medicare Payments in the Last Year of Life,” New England Journal of Medicine 328 (1993), pp. 1092–96.
  18. See Lubitz and Prioda, and Lubitz and Riley.
  19. “The Grand Unification Theory of Health Care,” Section 7, “Rationing and Death–Covert Rationing and End-of-Life Care,”