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The Economics of New Health TechnologiesIncentives, organization, and financing$

Joan Costa-Font, Christophe Courbage, and Alistair McGuire

Print publication date: 2009

Print ISBN-13: 9780199550685

Published to Oxford Scholarship Online: February 2010

DOI: 10.1093/acprof:oso/9780199550685.001.0001

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Technology: scientific force or power force?

Technology: scientific force or power force?

(p.43) Chapter 3 Technology: scientific force or power force?
The Economics of New Health Technologies

Nick Bosanquet

Oxford University Press

Abstract and Keywords

Technology is often presented for healthcare as an extraneous variable that can be used to explain the continuing rise in health care costs. The general consensus seems to be that most technology raises total expenditure, either through higher unit costs or through raising the volume of procedures. Recent events seem to have borne out Schwartz's forecast in 1994 that health services were on the brink of a period of rapid technological change and the consensus is that the change has cost a great deal. This chapter explores another model of how technology is determined. The changes in technology that have actually happened have been more diverse than was envisaged in 1994. Alongside the ‘big ticket’ technology projected by Schwartz, a ‘small ticket’ technology has grown up, which is much more available outside large hospitals in clinics, doctor's surgeries, or pharmacies. The rise of small ticket technology opens up a range of very different investment opportunities from those available in the past four decades.

Keywords:   health care innovation, health care technology, small ticket technology, big ticket technology, Schwartz


Technology is often presented for healthcare as an extraneous variable, a deus ex machina, that can be used to explain the continuing rise in health care costs. The pioneering work of Ann Scitovsky introduced the concepts of cost-reducing and cost-increasing technology (Skitovsky, 1985), yet these have not been widely used. The general consensus seems to be that most technology raises total expenditure, either through higher unit costs or through raising the volume of procedures. Recent events seem to have born out Schwartz’s forecast in 1994 that health services were on the brink of a period of rapid technological change and the consensus is that the change has cost a great deal (Schwartz 1994).

The aim of this chapter is to explore another model of how technology is determined. In fact, the changes in technology that have actually happened have been more diverse than was envisaged in 1994. Alongside the ‘big ticket’ technology projected by Schwartz, a ‘small ticket’ technology has grown up, which is much more available outside large hospitals in clinics, doctor’s surgeries, or pharmacies. This opens a range of choices for health policy on the design of new types of local services. Investment is no longer just about investment in hospitals. Health systems face a choice of valuing different combinations of big ticket and new, more local technology for prevention and care. The rise of small ticket technology opens up a range of very different investment opportunities from those available in the past four decades.


The future development of technology will not be determined only by impersonal forces of science, demography and changing disease patterns from outside the health service – it will depend on whether health services can develop a creative and flexible response to new problems. The new feature of the last decade has been the very strong gains from using competition and choice in a number of countries, and the effect this has had on the range of technology used. The coming of new technology has been linked to the development of competition and pluralism. The moves to competition have been particularly significant in insurance-based Bismarck systems, where it is possible for the funder to be independent of the provider (Health Consumer (p.44) Powerhouse 2008). The internal market has worked better in such systems than it has in the more centralized tax-funded systems. Can health care grasp the opportunity to use new kinds of small ticket technology and new approaches to patient care involving much better communication? The issue goes far beyond technology. The future of health services depends on whether health agencies can break away from old patterns, and unleash the forces of innovation and quality improvement that are there in health services.

Technology is usually presented as a given emerging from outside the health system. Both corporations and universities have some interest in the romantic view of technology – that it emerges from the heroic and selfless quest for innovation. Innovation emerges from pure research, science, and technology, all of which are dynamic, but dynamic because of the intellectual quest, rather than because of commercial considerations.

By another perspective, technology is not just the product of pure technical factors, the technological investments made reflect the interplay of professional forces and interests. In markets driven by consumers, the tendency is for the market to expand and cheapen technology. The outlook is very different when public sector producers control the funding. The technology developed will have few if any financial or market constraints.

The main drivers in this technology environment are:

  • The incentive to develop technology with high capital costs and which requires highly-qualified staff to operate and interpret the results. In mass markets technology becomes simpler and usable by a wide range of users. In health care this was rarely the case.

  • Clinical governance standards that mandate the use of expensive technology.

  • Risk assessment that stresses the gains to the use of high tech equipment.

  • Low levels of capacity use, which are brought about, in part, by the limited availability of specialist staff. High capital and labour costs also reduce the customer’s ability to pay.

Big ticket technology tends to create a toxic combination of long waiting times with low levels of capacity use. Typically, the utilization rate on public sector MRI scanners is about half of that on privately owned ones. There have been proposals for making more use of leasing to ensure that health services are not tying up funds in ‘frozen capital’ (Siemens 2006). This may help in reducing capital costs, but the problems of securing cost-effective operation remain.

Big ticket technology has led, in the past, to rising costs and longer queues. This is essentially because it uses scarce resources in staffing, which are always bound to be in short supply. The term ‘provider’ capture has been widely used and it presence widely suspected, but it has rarely been given any specific content. It could mean, however, that provider/professional utility led to investment in big ticket technology and its associated large hospitals that, in turn, helped to generate rising costs and access problems, with the general result that as the ‘market’ expands supply price rises. There is no sign of the developments found in markets where supply and demand have a virtuous circle by which more demand stimulates cost-reducing innovation. (p.45) The shortage leads, in fact, to higher entry barriers by raising the entry price. The entry problems may increase further through an arms race between local or regional centres to compete in big ticket technology – so that to the problems of rising cost may be added those of low levels of capacity utilization. These are typical impacts within the UK system. Within the USA, spending on imaging rose 20 per cent a year between 1999 and 2006. Scans per 1000 insured persons rose from 85 to 234 in the USA since 1999 (Whelan 2008). Pittsburgh has more MRI machines than Canada. The scan may not only incur direct cost, it may lead to much higher additional spending on further tests and even surgical operations. Now concerns about radiation exposure through the over-use of scans are finally leading to reductions in the use of scans: but only 18 per cent of requests are being rejected. A high level of over-use is now permanently funded and restrictions will tend to fade over time.

The new development in the last 10 years has been the emergence of more technology for primary care and local pharmacies. This provides an instructive contrast to big ticket technology for secondary care. There are a variety of new local diagnostics and treatment including:

  • cholesterol testing;

  • diabetes monitors;

  • nicotine replacement therapies;

  • IT/communication systems;

  • new methods of treating venous ulcers with Doppler assessment and the four layer bandage.

To these low-cost developments can be added the effects of IT in making the results of big ticket technology more available outside the hospital. Thus, PACS systems are transmitting X-ray pictures and MRI scan results so that they can be used and stored in clinics and doctor’s surgeries. These new tools offer much more diagnostic and treatment capability in primary care. There is, in effect, disputed territory between hospitals and clinics where services could go either way. The hospital may broaden what it does in out-reach clinics and in out-patient services, or local physicians and nurse practitioners may expand the range of services through polyclinics, expanded primary care – or nurse-led clinics of which WALMART are starting 3000 in the US.

Such developments were predicted in Regina Herzlinger’s powerful work Market Driven Health Care, which was published in 1997. She saw America and other developed nations as being at the start of a healthcare revolution:

These dramatic developments in medical technology enable the decentralization of powerful therapeutic, diagnostic and monitoring services. Services available only at vast, costly, hard to reach hospitals will instead be provided by inexpensive, easy-to-access clinics, physicians’ offices, ambulances, and helicopters. The most important feature of this newly formed landscape will be better health for all of us.

Ten years on, most of Europe, indeed most of the developed world, is still waiting. The degree of progress has shown some variability between systems and between specialities, but overall the level of progress has been far short of substantial. The vast majority of patients are still being treated in the old fragmented and hospital-based systems. (p.46) Health care in Europe remains a state-funded industry, which continues to roll on with obsolete services, while investing very little in new innovative ones. In fact, the continued spending on obsolete services compresses the margin available for spending on new services. This braking effect on innovation is reinforced by the impact of health technology: assessment that sets much higher standards for new therapies and programmes than for the time served and obsolescent. Health spending is in a rut kept there by the main economic incentive, which is all too often to extract the maximum benefit from producer subsidy, rather than to provide the services chosen by consumers.

In summary, spending on innovative programmes on care pathways E health, telehealth, and new accessible services can be estimated at 5–7 per cent in the UK and Germany, 1–3 per cent in France and Italy, and up to 20 per cent in Scandinavia. Where they do exist the new services tend to be dependent on demonstration projects often time limited and on special sources of funds such as EU grants. Some of these projects may be quite successful, but they are not career enhancing nor is their diffusion at all rapid even if they do succeed.

International evidence

We turn now to explore some of the areas where progress has taken place progress again the odds. What seem to be the main reasons or determinant factors behind choices where this new technology is taken up? Key variables could include the degree of competition in a health system. Where there is stronger competition, it would seem likely to generate incentives to use cost-reducing or quality-improving technology. Competition also creates pressures to increase output, which will create space for the adoption of new technology.

Health services that have moved towards greater pluralism have been the leaders in using small ticket technology. In Scandinavia there has been strong local autonomy though the county responsibility for commissioning services. Hospitals and primary care doctors have shown great drive for investing for IT systems. Doctors in Denmark now have the most advanced use of IT of any doctors. In Sweden, patient choice has lowered waiting times to a few weeks with patients free to move to alternatively-funded providers. In Finland, public health programmes have turned North Karelia round from one of the unhealthiest regions in Europe to one of the best. Finland has the lowest proportion of GDP (7–8 per cent 2005) of any developed country, but other countries in Scandinavia have shown that it is possible to provide a service with excellent access and outcomes for 8–9 per cent of GDP (OECD 2004).These systems have shown much success in developing care programmes. For example, 77.8 per cent of diabetics in Sweden had retinal examinations in the past year compared with 65.6 per cent in the US and 49.0 per cent in Germany. In Spain, the Netherlands, and Australia funding has been mixed, as well as provision. Again, there has been more rapid development of new services. In Spain, Sanitas (the private insurance group owned by the British Mutual Association BUPA) has been a significant investor in E health. In Australia, 45 hospitals in Victoria are linked in a hospital at home scheme. There have been successful national strategies for prevention of skin cancer in a land of eternal sunshine. In the Netherlands, competing insurance funds have to give (p.47) potential members metrics about their performance. In the UK, new providers have been attracted to provide wider choice in elective treatments, but there are signs that the reform programme is faltering, with strong incentives to public providers to block out competition.

The second key variable affecting the extent of use of small ticket technology would be the extent to which there is a strong primary care role in the health system. Primary care doctors are much more likely to use small ticket technology in diagnosis and care programmes. Health systems can be divided into those with a strong primary care base, as against those with direct access to specialist care and fee-for-service. As Table 3.1 shows the spending levels for the first type of system, at 8–9 per cent of GDP, are well below those for the second type, at 10–12 per cent. Yet all studies of population health, treatment outcomes and patient access show that the first type of system delivers results which are at least as good and in many dimensions better than the second. The use of small ticket technology will grow along with the deepening of activities in primary care. Where primary care doctors carry out more initial assessments and offer more services they are much more likely to use this technology. In contrast when activities are shifted into the secondary sector this will involve use of big ticket technology. Small ticket technology will also show variable use with the different roles of pharmacies and opticians. Where there is a more access and a wider range of services pharmacies and optician practices will be able to expand use of this technology.

Recent research on Kaiser Permanente, sponsored by the Department of Health itself, has confirmed that the first type of system in a regional context can, indeed, deliver very effective results. The original research showed that, on an adjusted PPP basis, the NHS spent $1784 per head, while Kaiser Permanente spent $1984 per head (Feachem et al. 2002). These results were fully adjusted for differences in the age composition of patients and in the differences in the range of services provided by the

Table 3.1 Growth of expenditure on health 1990–2005 – health spending as a percentage of GDP



Primary care-led systems:










New Zealand









United Kingdom



Fee for service-led systems













United States



Source: OECD Health Data (2007).

(p.48) two systems. Yet, later comparisons sponsored by the Department of Health showed that: ‘For the 11 causes selected for study, total bed use in the NHS is three-and-a-half times that of Kaiser’s standardized rate …’1 (Ham et al. 2003).

The level of spending generated in the first system reflects the costs of providing certain services involving primary care access, referral and protocol-driven secondary care. If this system is associated with higher levels of spending, this implies either higher costs than could be prudently managed or higher levels of activity. There is good international evidence that high levels of health spending are often associated with the flat of the curve – with waste and low quality in care. Detailed criticisms have been made, for example, of the low standard of cancer care in Germany and the poor quality of prescribing in France. A recent OECD summary concluded that:

While richer countries tend to spend more on health, there is still great variation in spending among countries with comparable incomes. Even more importantly the highest spending systems are not necessarily the ones that do best in meeting performance goals2

(OECD 2004)

Canada supplies a particularly strong example of how funding without reform may lead to an increase in waiting times and greater access problems. Between 1993 and 2003, average waiting times rose 70 per cent over a period when real spending per head rose 21 per cent, in constant 1995 dollars, from $1836 to $2223. Thus, higher levels of spending are often taken to conceal problems of low productivity.

Differences in the use of the low ticket technology are also disease specific. There has been particular success in improving services in coronary heart disease, an area of care that has shown very significant improvements in outcome – for example, in the UK, a 40 per cent reduction in premature deaths among males over the past decade.

In coronary heart disease, a new care pathway has emerged linking prevention, treatment of high risk groups with stents, early access to day treatment through better diagnostics and angioplasty, then rehabilitation. The care pathway show gains in innovation through the use of statins, stents, and precautionary home monitoring and telemedicine. In stroke prevention, COPD, and asthma, better primary care IT makes it possible to deliver nurse-led local programmes for high risk groups.

Six primary care practices in Runcorn Cheshire UK covered 64,000 patients. They set up a shared programme to identify patients with high levels of cholesterol. This identified 3300 patients who were assessed by practice nurses and treated with statins. An evaluation showered that in the first year there were 27 fewer deaths and these gains have continued in subsequent years at a cost of £470 per QALY (Colin-Thome 2002). In the UK, the National Service Framework for Coronary Heart Disease (CHD) has been highly successful in providing a focus for service developments.

Across Europe there are signs that the use of care pathways in diabetes may be having highly positive effects on diabetes care, with greater emphasis on prevention and on the use of nurse practitioners to design programmes for patients. In Germany there is (p.49) an innovative course run jointly by healthcare Academy Rheine and Roehampton University in the UK (J Huber, personal communication 2008). Other specialties, such as cancer services, are some way behind CHD and diabetes in development of more integrated services (DoH 2007).

There is some greater appreciation of the gains to competition and change. It is clear that use of new technology happens much more rapidly in open systems. In a growing industry there is a cluster of firms that compete for customers. The process of competition is essential for stimulating and speeding up innovation. The drive of these firms in raising output and reducing price in existing product areas makes it essential for firms to develop new products. Their drive to expansion also creates human capital and networks that make it easier for all firms to change and expand. None of these positive conditions exist where there is a monopoly. Instead, there is great interest in blocking any increase in output and minimizing investment in new technology. The traditional case against monopoly was defined in terms of higher prices and static output. We should now focus more on the effect of monopoly slowing down the process of change.

Technology futures

Overall change has come with desperate slowness. The forces of resistance include fear, self-interest, and shortage of working capital. There is fear of change and lack of confidence in new methods, and there is also fear of loss of control. Health services are still run on baronial system. Self-interest is in a continuing automatic flow of funds. Most health providers get paid for doing more of what they did yesterday and new services often carry lower reimbursement, as well as the greater effort and risk required to provide them. Shortage of working capital comes about through the fact that most health systems do not have depreciation systems or reserves to finance change and upgrade technology. In the NHS, the replacement of equipment is often postponed until breakdown and each new technology has to be the subject of special requisition. The path of the innovator has been seen as hard one ever since Machiavelli, but it is particularly hard in health services.

What could be the levers that would make for more rapid change over the next 10 years? The revolution has not gone away and there are powerful patient groups now pressing for change. There is also stronger evidence from other areas of the economy, such as airlines and banking, that digital technology can be crucial in improving service and containing cost.

Health service change and the increased use of IT should be seen in terms of disease-specific strategies. The main focus for change has been on waiting time for elective surgery, but it now needs to shift to care programmes for specific conditions – many of them longer-term medical conditions. As clinical specialization has become more complex and specific, IT has become more generic. Health professionals are certainly affected by more external scrutiny and more competition. This could be a powerful lever for change if professionals begin to see that better communication and use of care pathways is essential to their security and professional futures.

Systems that have developed primary care have found themselves with headroom of 2 per cent or more of GDP compared with those where there is direct access to (p.50) secondary care. The health systems that deliver access for less than 10 per cent of GDP – Scandinavia, Netherlands, Spain, and Australia – all have strong and developed primary care.

Change has to link to professional concerns about the quality of care. Change alone can deliver on the metrics required to meet professional concerns. It can also be a key resource in helping people to manage time. Most doctors worldwide are faced with a reality of longer working hours and pressure to meet new standards in improving the care of desperately sick patients.

The reality is that improved survival has created a host of new problems in continuity of care for many patients. The increase in medical specialization has made it more difficult to plan care programmes and to involve patients, and there are many more team members with an interest in patients. Add to this that care is no longer be delivered by lifetime professionals who were on duty for 80 h, but by a changing and often inexperienced work force, and you have a recipe for great confusion and disappointment – the day-to-day experience of many patients and staff in health systems worldwide.

Unlocking the full potential of small ticket technology

The key challenge is how to redefine healthcare as a communications programme. At present, healthcare is a series of fragmented activities, where there is every interest in keeping ownership of the fragments. If we get across to professionals that healthcare is a communications and decision programme in which they are trying to pull together a vast amount of disparate information, that will be real change.

Change can be a key resource to managers in linking financial and clinical priorities and programmes. The change to payment by results has begun to have positive effects in many health systems. Many hospital and primary care centres have to earn their income as individual enterprises. They are no longer getting an income automatically in generous annual budgets. Each euro or pound sterling has to be earned through an invoice for service. New technology is the only way in which managers can get this kind of financial information. Across Europe there is a huge challenge in linking financial information with information on clinical activity.

New technology could be the way forward for where services are in great need of redesign. There are few services where communication is more fragmented at present than cancer services. Managers are beginning to struggle with a new paradigm involving prevention, screening, referral, rapid diagnosis, minimally-invasive surgery or active chemo/radiotherapy, and then care pathways for risk management and palliative care. Each stage has effects on other stages. Thus, expansion of screening may generate false positives, which delay treatment for other patients, but in principle this new paradigm offers great hope for improving services against a background of increasing potential for effective treatment, rising patient numbers, and constricted funding (Bosanquet and Sikora 2006).

In the UK, numbers of patients with cancer will increase by 30 per cent over the next 10 years and patients will, in principle, be able to benefit from more complex treatments. Cancer will become a longer-term illness, which will in itself raise (p.51) treatment costs. There will be new pressures to develop new services in ambulatory and home care. Already much chemotherapy can be delivered at home. In England in 2007, £4.8 bn was being spent on cancer services and, of this, £1.5 bn was spent on patient treatment, with 100,000 emergency admissions a year. The challenge of redesigning service is a massive one, and can only be achieved though use of new technology and E health.

Across Europe health indicators in obesity and activity are worsening, with an additional special problem in the UK of rising levels of drinking especially among teenagers and young people. There is an urgent requirement for new programmes to increase communication and motivation in public health. E health, and new technology can also be presented as the only way of achieving some catch-up in neglected or unpopular services. In the UK there are serious gaps in stroke care, chronic lung disease, and in assistance with deafness and hearing problems.

Stroke is the leading case of adult disability, and just behind CHD and cancer as a cause of mortality. According to a recent National Audit Office Report, 50 per cent of patients do not receive the proper rehabilitation needed to make a proper recovery in the crucial months following a stroke. Many do not receive simple information about their condition and recovery (National Audit Office 2005).

In chronic lung disease (COPD) there are 900,000 people who have been diagnosed. A recent Healthcare Commission Report found that ‘In some areas, services provided to people with COPD do not meet existing clinical guidelines and there wide variations in standards of care across the country. In addition, many people with COPD come from communities with high levels of deprivation and often experience difficulty in gaining access to appropriate services. ‘The rate of mortality for respiratory disease in the UK is almost double the European average (Healthcare Commission 2006).

Change and E health have to be seen as the only way that health funders are going to be able to make progress to improve services for neglected groups of patients in the community. It is highly unlikely this can be come through the development of further hospital services. The next phase of healthcare could promise real progress in a number of areas in new therapies, and in better results for patients. It also promises to be a time of much greater funding restriction. The Herzlinger revolution has been held off, but is now compelling as, in fact, the only way in which services can gain investment and develop the flexibility to meet new needs.


Technology is then a battle ground between competing models of health care. Primary care technology is low cost and accessible. Secondary care technology is exclusive and expensive. Often there is little information on value and effectiveness but such methods become some of the must dos set by lead clinicians and professional organizations. Such technology as used at present is part of the pull towards specialization and concentration of services on few sites. These choices in technology structure the supplier markets. They lead to a situation in which a few firms dominate a global industry – indeed, concentration in such products as scanners has increased in the past decade.

(p.52) These changes bring new opportunities for companies involved in health insurance. Innovation becomes more important for health services and more local. Higher patient expectations of new services will test the capability of tax funded services to deliver an expanding range of new services. Health insurance can develop a complementary role to state funded services in offering more scope for innovation. It can use advantages of greater flexibility and greater ability to generate investment in a timely fashion. They can also show greater priority in communicating with patients and clients. Health insurance can develop relationships with a new generation of young people who have less faith in centralized state funded services. They are close to other service activities which use the new small ticket technologies and can use this advantage to develop new activities. The coming of small ticket technology gives extra force to the case for competition and pluralism.


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(1) Low not small.

(2) COPD Chronic Obstructive Pulmonary Disease, IT Information Technology.