Impact of Technological Change on the Cost of Health Service

Technological developments entail improvement in production/service frontiers either by providing cost benefit advantages with superior outputs (by replacing old products) or by providing new or improved products. However, the mix of products and services available in the market may raise the average cost of treatment with a consequent increase in the per capita health expenditure. This characteristic of technological development has led to a wide spread belief that technological change has accounted for the bulk of increase in medical cost over time. But such a conclusion does not necessarily follow as they have also resulted in new methods of diagnosis and treatment giving the benefit of increased longevity, improved quality of life, less absenteeism from work, etc. These benefits need to be duly weighed as the social benefits of technological advancements are very high.

Although the average cost of medical service increases with new developments in health services, with time and wider adaptivity of new methods, the cost of services tends to stabilise at an optimal level. In the meantime, however, lack of competition and other market failures inflate the cost of advanced medical facilities paving way for the medical insurance providers to gain ground in the market. Besides the angle of moral hazard associated with insurance coverage from the consumers side, the developments also provide opportunities for many medical malpractices (e.g., costly procedures advocated frequently). Thus, given the potential for misuse and the welfare of so many at stake, protecting the interests of consumers becomes an important responsibility of the governments.