Question

Why have quality improvements in health care caused costs to rise while quality improvements in computers have caused costs to fall?

Answer 1

Quality improvements in computer have caused the cost to fall because of economies of scale. Economics of a scalar present when bulk production reduces the per unit cost. When a particular industry experience a new technology that reduces its cost of production the industries able to produce a large number of output and so the per unit cost goes on falling.

Hospitals are quite different from typical Industries where labour and capital are the usual factors. More than often hospitals are engaged in finding a new method of curing a particular disease or developing a treatment instead of finding a method to reduce the cost. There is a strong competition among all the firms in an industry because consumers always prefer in low price product with standard quality.

Hospitals do not compete so strongly in prices because the level of medical treatment and expertise possessed by a typical hospital help in granting some market power. With the presence of insurance and cost reimbursement whatever price competition is left also vanishes. In this sense there is no incentive for the hospital and the research laboratories to develop methods to reduce the cost or to produce cheaper equipment. This is the reason why quality improvements in healthcare are often cost increasing rather than cost reducing.