Lower costs mean higher spending in healthcare

My column in The Times on healthcare costs:

Babies got cheaper this week. Twice. First, Belgian scientists announced that their new method has the potential to cut the costs of some in-vitro fertilisation treatments from £5,000 to below £200. Their cut-price recipe requires little more than baking soda and lemon juice in place of purified carbon dioxide gas to maintain acidity when growing an embryo in a lab before implanting it.

Second, a baby called Connor was born after 13 of his parents’ embryos had their genomes analysed using next-generation DNA-sequencing techniques in an Oxford laboratory. Only three of the embryos were found to have the right chromosome number, and one of these “normal” embryos was then implanted in his mother. This new approach, made possible by the rapidly falling cost of DNA sequencing, promises to cut the number of failures during IVF, reducing both cost and heartache.

The two announcements are a reminder that cost reduction and productivity boosts are the purpose of most innovation. Medicine is no exception. Innovation is driving down the costs of medical interventions all the time, and the falls may be about to accelerate, thanks to biotechnology and information technology.

Whence, then, the relentless rise in the costs of healthcare? Part of the answer is known as the Jevons paradox after the Victorian economist Stanley Jevons. Innovation makes new interventions possible, so increasing demand. IVF is a good example: until 35 years ago, infertility went untreated, so cost nothing.

The economist Don Boudreaux recently listed just some of the healthcare products that were not available at all, for love nor money, in 1980 but are now there to have money spent on them: statins, Prozac, cyclosporin used to make organ transplants successful, laser vision-correction surgery, artificial hearts, magnetic resonance imaging (MRIs), Viagra, disposable contact lenses, keyhole surgery, the morning-after Pill. (Some antibiotics and antimalarials have gone in the other direction, becoming less effective, but not much else.) As an example of a falling cost that could drive up spending by creating new demand, consider genetics. Nobody would have dreamt of reading the genes of a virus to diagnose your lurgy even a few years ago, but it will probably be routine in the next decade, at least in test-happy America. If you replace the instruction “take an aspirin and call me if it gets worse” with sending a sample to a lab for a DNA analysis, followed by a prescription, you are bound to raise costs.

This has been made thinkable by the fall in the price of DNA sequencing, extraordinary even compared with the plummeting cost of computing over recent decades. The first full human DNA sequence, finished ten years ago, cost billions of dollars, but within a few years it was being done for millions. Today it costs a few thousand, and the three-figure genome sequence is in sight. The cost of looking for a few mutations rather than sequencing an entire genome is far lower still. As genetic analysis gets cheaper, it is bound to become more widespread. Before handing you a pill, it would be a good idea for the doctor to find if you have any of the mutations that make the pill ineffective or toxic, for example.

It is not just biotech that’s getting cheaper. Cataract operations have been speeded up tenfold, making them far cheaper. That is bringing them in reach of people in poor countries. A company called Aurolab makes intra-ocular lenses in India for cataract patients and has brought the cost of a lens down from hundreds of dollars to $2. Its founder, David Green, is now developing Bluetooth technology so that your mobile phone becomes the brainy bit of your hearing aid. He aims to bring hearing aids within the price range of people in poor countries.

At Imperial College, the professor of orthopaedic surgery Justin Cobb is using 3D printers to fabricate patient-specific surgical tools and implants. With smaller incisions, this can result in almost halving the time spent cutting the bone, not to mention better outcomes and lower costs. The surgeon scans your knee, generating a virtual image, from which instruments and guides are designed and printed so that the bone cuts you need are exactly matched to the tailor-made implant. This kind of thing, combined with much better local anaesthetics, means that in the US major knee operations are becoming more affordable day cases in special clinics rather than necessitating long stays in hospitals.

In this country, such a switch would be less easy because the NHS is such an unwieldy and political organisation, and generally poor at local experimentation — politicians like to dismiss variation as a “postcode lottery”. The NHS is also hide-bound by restrictive practices that prioritise the producers rather than the consumers of healthcare. In other words, however good we are at technological innovation, organisational innovation tends to be much less nimble here.

It does not help that there are perverse incentives to over-diagnose and over-treat, driven by the provision of healthcare free at the point of delivery (here), or by the ability of healthcare professionals to charge fees to the insurance industry (in the US). Tonsils, hernias, prostate problems and other things have long been over-treated.

Another trouble with healthcare costs comes from a different lurgy: Baumol’s cost disease. The economist William Baumol identified a problem years ago whereby falling costs in one sector induce rising costs in another. If productivity goes up in manufacturing, then wages rise and service industries have to put up wages to compete for labour, even if productivity in services has not risen. Labour-intensive sectors such as health and social care get saddled with high costs.

Camilla Cavendish, a former Times columnist, produced a report for the Government this week arguing for standardised training for care assistants: a good thing, surely, but unlikely to cut costs. As longevity improves and old age stretches out for longer, the most basic element of care, the human hand, becomes more important. And here productivity can’t much be boosted — there are only so many old people one can wash and feed in an hour.

It is just possible that accelerating technological change will bring medical costs down so fast and so widely that spending on healthcare can shrink as a proportion of household budgets. It is far more likely, though, that innovation will greatly expand the treatments available to us, resulting in ever greater political challenges in how to ration health care, whether by price, by NICE or by waiting list.

In short spending will rise, however much costs fall. This is not necessarily a disaster. That we spend a growing proportion of our income on health makes sense for three reasons: there are more treatments that work, we’re getting older, and other things like food and clothing are so much cheaper.