Machines that Go 'Ping': Medical Technology and Health Expenditures in OECD Countries

Technology is believed to be a major determinant of increasing health spending. The main difficulty to quantify its effect is to find suitable proxies to measure medical technological innovation. This paper's main contribution is the use of data on approved medical devices and drugs to proxy for medical technology. The effects of these variables on total real per capita health spending are estimated using a panel model for 18 Organisation for Economic Co-operation and Development (OECD) countries covering the period 1981-2012. The results confirm the substantial cost-increasing effect of medical technology, which accounts for almost 50% of the explained historical growth of spending. Despite the overall net positive effect of technology, the effect of two subgroups of approvals on expenditure is significantly negative. These subgroups can be thought of as representing 'incremental medical innovation', whereas the positive effects are related to radically innovative pharmaceutical products and devices. A separate time series model was estimated for the USA because the FDA approval data in fact only apply to the USA, while they serve as proxies for the other OECD countries. Our empirical model includes an indicator of obesity, and estimations confirm the substantial contribution of this lifestyle variable to health spending growth in the countries studied.