Examining the Impact of Technology on the Rising Cost of Healthcare Part 1

A Whitepaper by Gary W. Bennett, President Aspyra, LLC
Aspyra is a Medical Device manufacturer providing Laboratory Information
System (LIS) software and Picture Archiving and Communication System (PACS)
software to Healthcare facilities worldwide since 1985.

Consider this statement from a research paper dated July 19, 2000: “In health care research, the impact of medical technology on health care cost increases has always been a great unknown. Yet 81 percent of the leading health economists agreed with the statement, “The primary reason for the increase in the health sector’s share of GDP over the past 30 years is technological change in medicine”.
Of course, in most areas of the economy a rapid pace of technological advance is regarded as a good thing. That this is not the case for medical care reflects a second point of consensus.”¹

Now a full two decades later, the conversation around this topic has not slowed down and neither has the cost of healthcare. It is unfair to lump all of healthcare costs into a single bucket. We need to breakdown which area we are discussing at each level, some of which have become new, separate industries, all on their own. The “Thirty Thousand Foot” level of healthcare sectors include:
1. Administrative Costs which include: Transaction related costs, benefits management costs, selling and marketing costs and regulatory & compliance costs.
2. Capital Expenditure Costs which include: Facility acquisition, diagnostic equipment acquisition and debt servicing for the borrowed funds related to acquisition and expansion.
3. Ongoing Maintenance and Support of Facilities, Equipment and Software including: Physical maintenance of facilities and equipment (which is more and more technical in nature) Technical hardware warranties and ongoing software support.

4. Providers and other Care Giver Costs: Physicians, Physicians Assistant’s, Nurse Practitioner’s, Nurses including BSN’s and MSN’s, CNA’s, LPN’s, Medical Assistants and more.
5. Pharmaceutical and Implant/Prosthetic Costs including: Prescription IV’s and other medicines: curative, preventative, therapeutic, palliative and medical devices, surgical tools, implantable devices, wound care and rehabilitation.

In this examination, we will focus on the cost areas that comprise the infrastructure that provide the place, the tools & data capture and reporting which are items 1., 2. and 3. above. Over this multi-part series, we will look at the history of how we got to where we are today and the multiple elements that drive healthcare costs. We will try to address the primary pressures on the cost of healthcare and ultimately offer our hypothesis of whether technology has an impact on it while accessing if the cost to benefit ratio is reasonable in today’s economic climate. Let’s first look at item 1 in detail.

There are so many elements of life in the U.S. that dictate how we deliver healthcare in our country, we could literally speculate endlessly on a plethora of topics that have had or are making an impact on our costs, at not only the consumer level but at the hospital, provider, supplier and insurer levels. If you have worked in the healthcare industry over the last 50 years, you most likely have seen some aspect of the change. If you have worked in healthcare over the last 20 years, you will have experienced first-hand the exponential growth of technology in your workplace. In fact, you will have seen the evolution of many co-workers, maybe even yourself, from care-giving positions to Subject Matter Experts (SME’s) for some type of new technology that has been embraced by your facility. Is this possibly the primary driving force behind the increasing cost of healthcare?

There have been numerous research studies to determine the impact of technology on healthcare over the years dating back to the early 1970’s, around the time that the HMO health plan options were created under the HMO Act². Back then, the technology needed was to provide for a way to manage the administrative side of the health visit for health insurers, hospitals, nursing homes, physicians, employers and individuals/consumers.³ The rapid growth of HMO enrollment in the first 10 years alone, from under 1 Million in 1973 to over 10 Million in 1980 (the year before
the IBM PC was introduced), 20 Million in 1985, over 30 Million in 1990 and well over 80 Million participants by the turn of the century in the year 2000⁴ may demonstrate how the cost of healthcare had grown in the last 30 years of the 20th century.

This effort began the move for the widespread implementation of Electronic Medical Record systems, which mostly started as “one-off” efforts by larger healthcare organizations to meet their individual needs based on the demands of the industry for billing, claim filing & reporting. As always happens in a free market society when good solutions to real problems surface, they are embraced by those in need and a new industry is created and both the solution and the number of suppliers proliferates.

According to Bergen Adair in the article Future of Electronic Medical Records: Experts Predict EMR Trends in 2020⁵ “The first step to modernize EMR was to digitize it. In 2004, President George W. Bush signed an executive order that was designed to oversee the development of health information technology infrastructure that includes the adoption of EMRs and EHRs (electronic health records). In 2016, the government began an EHR implementation incentive program that offers kickbacks and benefits to providers that utilize EMR or EHR. And it’s working: in a 2017 survey of national electronic health records,
87 percent of physicians reported using an EHR or EMR system.”

This assessment is a long way from the results of a 2004 study entitled “Barriers to Proliferation of Electronic Medical Records” published in The Journal of Innovation in Health Informatics 12(1):3-9 · February 2004, that said: “Fewer than 10% of all healthcare systems in the United States use significant computerisation, despite the fact that healthcare delivery through integrated computer systems yields reduced medical errors and lowered medical costs.^{REFERENCES 1–5} While many have attempted to implement healthcare information technology solutions, costly failure has been the rule, not the exception.^{REFERENCES 6,7}”

This leads us to the conclusion that between the studies in the early part of the 21^st century that showed only 10% adoption of an EMR/EHR system to 2017 studies showing an 87% adoption rate, the hurdles and barriers impeding the movement to electronic medical records have been broken down. With this paradigm shift in how medical facilities and providers manage their “digital paperwork” (now known as “PHI” or protected health information, formerly known simply as medical records), is of primary focus on this investigation into the impact of technology on the rising cost of healthcare in America. In order to put some perspective by applying the dollars and cents part of the equation, let’s now compare the cost of healthcare over the years as a percentage of GDP or Gross Domestic Product, a key economic indicator.

In the table below,⁶ using the GDP as our barometer, we can see the history of healthcare expenditures as a percentage of GDP, went from 4% in 1950 to almost 14% in year 2000. Of special significance is that over the 30 years from 1950 through 1980, the percentage of GDP about doubled and in the following 20 years from 1980 to 2000, it almost doubled again

Now consider the following table⁷ that shows the increase in medical expenditures from the year 1960 to 2017 with projections for 2018 & 2019.

It’s clear that both sets of data match the growth that was experienced in healthcare costs from 1970 through to 2000 which was 6.4%, up from 6.9% to 13.3% and are the years we examined for the rise in popularity of the HMO. This is a 92.8% increase in healthcare costs in the U.S. in the first 30 years of our examination period and a 159.4% increase in the full 50 years of our examination period. The increase since 2000 to 2017 (the last year of actual data in the table above) is only 4.6% increase in the U.S. GDP but represents a 34.6% increase from 2000 to 2017.
These numbers however, only tell a part of the story. To find the actual increase in the cost of healthcare, we need to calculate in the growth rate of the GDP numbers from 1970 to 2020. The table below⁸ shows just what we are looking for:

So percentages of GDP are established, but what does this mean in dollars and cents overall and then to the provider/facility and consumer?

Below is a chart⁹ by the US Federal Reserve Bank of St. Louis that shows the Gross Domestic Product (GDP) in U.S. dollars, and the change is staggering. It starts in our examination period, January 1, 1070 at 1.051 Trillion dollars and ends September 30, 2019 at 21.542 Trillion dollars. The 2019 number is literally more than 20 times what it was in 1970.

Now, let’s do the math. The charts¹⁰ we have created below, takes the increase in the cost of healthcare based on the percentage of GDP, then compounds it (calculates the increases year over year) based on the growth of the GDP over the period to arrive at the per Capita cost for each of the years. “Per Capita” means every person alive in the US at that particular time.

Now let’s put the same data into a visual where we can more easily identify some trends. The first is the rapid “Rate” of increase from 1970 to 2000; second is the dramatic jump from 2000 to 2005 and lastly, that while the increase has slowed, it continues its rise to the current levels.

The last thing we need to look at for the rise in healthcare costs over the 50 year period is inflation. The chart below¹¹ shows how much it has taken over the years to match $1.00 in 1970. In short, it takes $6.48 in 2018 to get the same amount of goods and services that cost us $1.00 in 1970.

It is no coincidence that the curve in the above two charts are almost identical. If we take the $11,369.61 per Capita cost of healthcare in 2018, divided by the $6.48 inflation (1970 equivalent rate), today’s per Capita cost of healthcare is $1,754.57 per person which is an increase of 396% ($1,754.57 minus $353.75 1970 PC rate = $1,400.82 increase in the inflation adjusted per capita rate, divided by $1,754.57 = 396%).

With all other factors of healthcare being equally accounted for in terms of HMO’s, GDP and inflation, including an apparent stabilization as of healthcare costs as a percent of GDP between 2010 and 2018,¹² it is our contention that technology’s impact on administrative, Capital Expenditures (purchase of technology infrastructure & equipment) and related maintenance should be considered a primary factor contributing to the Rising Cost of Healthcare.

In our next installment of this investigation, we will look at the Electronic Medical Record paradigm and the impact it is having on the Rising Cost of Healthcare amid reports of EMR systems cost forcing financial hardship and bankruptcies of many Community owned hospitals and what are we going to do about it to retain acute care options in these communities.