The dynamics of technological change in

This paper contrasts a dynamic and interactive view of technological change with the linear model of medical innovation that is still so deeply ingrained in many policy discussions. In particular, it focuses on the role of feedback mechanisms between the users and the developers of medical technology and the demand and supply forces (including competition among medical specialties) determining this feedback. It explores three distinct mechanisms by which technological change may contribute to rising health care spending: intensity of use of existing technology, introduction of new technologies, and expanded application of these new technologies. The health care reform debate in the United States is focusing attention on technological change, mainly because it has been widely identified as the principal culprit in the rising costs of medical care. Authoritative analysts such as Victor Fuchs have written of a “technological imperative” driving up the cost of medical care through its influence on medical choices. More recently Joseph Newhouse has suggested that more than 50 percent of the total rise in real medical care costs (after inflation) is attributable to technological changes. This appears to contradict conventional wisdom. Outside of medicine, technological change is identified as the primary driving force behind improved productivity and economic growth. One of the most decisive effects of technological change is that it makes it possible to produce a given volume of output with a smaller volume of inputs. Why, then, when considering medicine, is technological change deemed responsible for rising costs? Addressing this apparent anomaly, first of all, requires careful examination of the static functioning of the health care system-how it allocates and uses the resources available at a particular moment in time, In the past the operation of this system has been subject to a number of distortions that have flowed primarily from (1) the extreme information asymmetry between physician and patient that has allowed the physician to determine the demand for medical services; and (2) the fact that third-party payment has insulated patients and physicians from the financial implications of their medical care decisions. In an environment of considerable uncertainty concerning the real value of medical interventions, physicians have been able to expand the demand for medical services, an expansion that has been intensified by a concern over malpractice suits. Such “defensive medicine” has also been consistent with the financial, sociocultural, and professional incentives encouraging the broad application of technology. Recently, these distortions have led to suggestions for “fixing” the system, including more systematic copayments, higher deductibles, managed competition, and the like. However, several dynamic issues involving the ways in which new technologies are developed, adopted, and adapted are equally critical to long run containment of rising medical costs. Surprisingly, the processes through which new medical procedures and products are generated and introduced on O cber 1, 2017 by H W T am H ealth A fairs by http://conealthaffairs.org/ D ow nladed fom 30 HEALTH AFFAIRS | Summer 1994 have received much less attention in the current health care reform debate. The primary purpose of this paper is to examine the underlying dynamics of technological innovation in medicine. In our view, it is not possible to establish causal connections between technological change and rising medical costs without first understanding these dynamics. Once these forces have been grasped more clearly, the relationship between technology and medical care costs will be more powerfully illuminated. Some Salient Characteristics Of Medical Innovation The popular perception of medical innovation is one in which a group of biomedical scientists has a bright new idea, which then moves in a linear progression from the laboratory to animal models, to select populations, and finally to the bedside (Exhibit 1). Although much innovation in medicine flows in this fashion, this linear conceptualization captures only part of the reality, particularly with regard to medical devices. A high percentage of new medical devices have emerged not out of biomedical research, but through transfer of technologies that were developed elsewhere: lasers, ultrasound, magnetic resonance spectroscopy, and that most general-purpose of all technologies, the computer. Both the modern intensive care unit, with its dependence upon elaborate monitoring technologies, and much medical research itself have been based upon new capabilities acquired through transfer and subsequent modification to suit the particular needs of the medical sector. Indeed, it may be much closer to the truth to say that these electronic technologies have vastly strengthened the capacity to perform “upstream” biomedical research than that they were the results of such research in the first place. Magnetic resonance imaging (MRI), for example, a technology that had its origins in basic research on the structure of the atom, later was transformed into a major diagnostic tool. This diagnostic tool, in turn, has vastly improved the ability to research various internal organs-thus highlighting the nonlinear nature of the innovation process. Another drawback of the linear model is that it implies that one can make a neat distinction between research and development (R&D) on the one hand and adoption on the other, with all of the uncertainty inherent in Exhibit 1 A Linear Model Of Medical Innovation on O cber 1, 2017 by H W T am H ealth A fairs by http://conealthaffairs.org/ D ow nladed fom TECHNOLOGICAL CHANGE 31 innovation attached to the former. Certainly, if one looks at the whole spectrum of R&D, the uncertainties appear to be larger the more one moves toward the basic research end of the spectrum. But it is a serious misperception to think that all important uncertainties have been ironed out by the time a new technology has finally been introduced into clinical practice. In fact, much uncertainty associated with a new technology can be resolved only after extensive use in practice. Thus, development does not end with the adoption of an innovation. Actual adoption constitutes only the beginning of an often prolonged process in which important redesigning takes place, exploiting the feedback of new information generated by users. Development of the “pill” is a case in point. The widespread introduction of the first oral contraceptives into clinical practice during the early 1960s confirmed their high degree of effectiveness but also revealed that their use increased the risk for thromboembolic disorders. The suspicion, based on subsequent research, that estrogen might be responsible for such circulatory diseases stimulated manufacturers to reduce estrogen levels and develop low-dose pills, which led to a dramatic decline in side effects. Because the first drug in a new therapeutic class is probably never the optimal version, incremental improvements after initial adoption play an important role in pharmaceutical and biological development. Medical devices are characterized by even higher levels of incremental change than is true for therapeutic drugs. Consider, for instance, the evolution of endoscopes. Today’s “cold-light” video-endoscope, with a computer-chip camera at its tip and with capabilities that allow its use both for diagnosis and therapy, is a world apart from its predecessor of the early 1950s. During those years, for instance, the lamp at the tip of the endoscope could cause serious bums, vision was often restricted, the quality of images was poor, therapeutic applications were essentially nonexistent, and obtaining some form of permanent documentation of the images was highly problematic. Feedback from users encouraged manufacturers to develop subsequent generations of endocscopes. Whereas the evolution of endoscopic technology did indeed require a few major improvements, such as the introduction of fiberoptics and video camera capabilities, its current characteristics depend heavily on a continuous flow of refinements. These modifications have resulted in improved flexibility, maneuverability, miniaturization, and visibility and have vastly expanded the therapeutic possibilities of endoscopy. This incremental, developmental activity occurs not only in industrial R&D laboratories, but in the context of clinical practice as well. For example, small departures from established practice in everyday clinical settings have yielded several important advances, a process that has produced substantial progress in surgery. But the phenomenon applies as well on O cber 1, 2017 by H W T am H ealth A fairs by http://conealthaffairs.org/ D ow nladed fom 32 HEALTH AFFAIRS | Summer 1994 to technologies that are the end result of elaborate, formal R&D processes, such as those of pharmaceuticals. When new pharmaceuticals are introduced into clinical practice, entirely new indications of use are commonly revealed. A case in point is the application of adrenergic beta-blocking drugs, one of the more significant medical innovations of our time, to new uses. These compounds were originally introduced for the treatment of two cardiovascular indications, arrhythmia and angina pectoris. Today they are used in the treatment of more than twenty diverse conditions, largely as a result of clinical discoveries made after beta-blockers were in general use. In the medical device arena, the lengthy evolution of lasers tells a similar story. Originally introduced for ophthalmologic and dermatologic purposes, the laser is now being used, or evaluated, for a wide variety of indications in gynecology, gastroenterology, oncology, thoracic surgery, and numerous other specialties. These observations underline two critical characteristics of innovation in medicine: (1) New technologies retain a high degree of uncertainty lo