Telecommunications and cost savings in health care services.I. Introduction
Public concern and government attention has focused on the explosive rise in health care costs. Analysts in various academic and professional fields have investigated the ways in which health care costs can be controlled while improving the quality and availability of medical services. While several policy- and technology-based options have been examined, testimony presented at recent congressional hearings Congressional hearings are the principal formal method by which committees collect and analyze information in the early stages of legislative policymaking. Whether confirmation hearings — a procedure unique to the Senate — legislative, oversight, investigative, or a attests to the potential for telecommunications services In telecommunication, the term telecommunications service has the following meanings:
1. Any service provided by a telecommunication provider.
2. , in particular, to broaden the availability and quality of health care services while moderating the costs of those services.(1) Practicing physicians, medical researchers, appointed officials, and other medical specialists have extolled telecommunications' role in enabling doctors to provide better service. All parties familiar with the ways in which telecommunications services have benefited health care urge policy makers to recognize these contributions and ensure that telecommunications Communicating information, including data, text, pictures, voice and video over long distance. See communications. , as a relatively low-cost means of improving quality and access, continue to be exploited in the provision of health care services. As summarized by J. Michael McGinnis, M.D., Deputy Assistant Secretary for Health,
As we look for ways to improve our effectiveness in reaching the public and health professionals alike with timely, relevant, and accessible health information, we look to new communication technologies not to solve our problems, but to provide us with the opportunity to develop new, creative solutions to improving the public health .
The health care sector is not unlike other sectors in its attempts to improve productivity and quality through increased usage of telecommunications services. Aggregate and sector-specific research conducted by DRI/McGraw-Hill has revealed a rapid increase in almost every industry's real usage of telecommunications services between 1963 and 1991, owing partly to steady declines in the price of telecommunications relative to other inputs. In each industry, as telecommunications displaced displaced
see displacement. less efficient and more costly inputs, productivity increased: since 1978, about 25% of total direct and indirect aggregate productivity gains resulted from advances in telecommunications production and enhanced consumption possibilities for end-user industries . These productivity gains saved the 1991 economy $102 billion in primary resources, excluding the savings enjoyed by the health care services and educational services sectors.
How, then, have doctors, hospitals and researchers used telecommunications services to control costs and improve access and quality? And, given the staggering growth in health care costs, what cost savings associated with the health care industry's usage of telecommunications can be calculated? This paper will focus on presenting the statistical methods that researchers at DRI/McGraw-Hill have used to answer the second question. In the first section, we assess patterns of telecommunications usage in the health care sector. In the second section, we describe the econometric modeling Econometric models are used by economists to find standard relationships among aspects of the macroeconomy and use those relationships to predict the effects of certain events (like government policies) on inflation, unemployment, growth, etc. techniques used to estimate cost savings associated with telecommunications usage. In the third section, we present the results of this research and we detail statistical findings that help substantiate To establish the existence or truth of a particular fact through the use of competent evidence; to verify.
For example, an Eyewitness might be called by a party to a lawsuit to substantiate that party's testimony. hypotheses that the health care services industry may have foregone fore·gone
Past participle of forego1.
Having gone before; previous.
Usage Note: The word foregone has recently developed a new meaning as a truncation of the phrase substantial cost savings by failing to more aggressively employ telecommunications technologies. Emphasis will be placed on using the modeling procedure to integrate and expand existing projections of health care costs, and to estimate the ways that telecommunications services might reduce health care costs through the year 2000.
II. Cost Savings Due to Telecommunications Advances: The Issue in Context
Limited Access and Growing Expenditures
Expenditures on hospital care, physicians, drugs and other medical nondurables, nursing home care, and other medical goods and services In economics, economic output is divided into physical goods and intangible services. Consumption of goods and services is assumed to produce utility (unless the "good" is a "bad"). It is often used when referring to a Goods and Services Tax. rose from $250 billion in 1980 to $666 billion in 1990, and expenditures are forecasted to reach $1.679 trillion by the year 2000 . From 1965 to 1990, the proportion of Gross Domestic Product (GDP GDP (guanosine diphosphate): see guanine. ) devoted to health care doubled from 6% to 12%; health care is projected to comprise 18% of GDP by the year 2000 . An important part of this shift in expenditures is the sharp growth in the real price of health care services. During the 1980s, health care prices rose at twice the average rate of inflation, and, consequently, "rapid increases in the real price of health care have contributed to the overall rise in spending" . Indeed, by 1991, health care costs indexed to 1964 were almost twice as high as the general price level. The change in the general level of consumer prices is compared with the change in consumer health care prices in Figure 1.
In conjunction with spiraling costs, U. S. health care delivery faces a problem of limited access. With health insurance a critical means of financing health care, the Congressional Budget Office The Congressional Budget Office (CBO) is responsible for economic forecasting and fiscal policy analysis, scorekeeeping, cost projections, and an Annual Report on the Federal Budget. The office also underdakes special budget-related studies at the request of Congress. reports: "According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the March 1992 Current Population Survey, more than 35 million people--14 percent of the total population--had no health insurance . People in single-parent families single-parent family Social medicine A family unit with a mother or father and unmarried children. See Father 'factor.', Latchkey children, Quality time, Supermom. Cf Extended family, Nuclear family, Two parent advantage. and in families with an unemployed worker, young adults, and black Americans are disproportionately dis·pro·por·tion·ate
Out of proportion, as in size, shape, or amount.
dispro·por represented among the uninsured" . At the same time, access is diminishing as critical care facilities are being concentrated at more limited sites. As governmental bodies are increasingly drawn into the mechanisms of health care service, either as regulators, planners, policy makers, or providers of funding, these bodies will have to weigh measures designed to meet the often conflicting ends of promoting access, advancing quality, and containing costs.
Promoting Quality and Access via Telecommunications
In recent years, technical advances and innovative applications have generated an important role for telecommunications services in enhancing health care access and improving service quality. Advanced fiber-optic networks facilitate the dissemination dissemination Medtalk The spread of a pernicious process–eg, CA, acute infection Oncology Metastasis, see there of medical tests, records, research data, and findings, and the transfer of patient information involving medical imaging technologies. Telecommunications also enhances the abilities of medical professionals to communicate personally with each other and for both professionals and patients to access medical information via electronic networks. At the Mayo Clinic Mayo Clinic: see Mayo, Charles Horace.
voluntary association of more than 500 physicians in Rochester, Minnesota. [Am. Hist.: EB, 11: 723]
See : Medicine , "telemedicine ("long distance" medicine) Using a videoconferencing link to a large medical center in order that rural health care facilities can perform diagnosis and treatment. A specialist can monitor the patient remotely taking cues from the general practitioner or nurse who is actually examining " links the clinic with experts at other locations by means of two-way broadband television . In Memphis, Tennessee For the ancient Egyptian capital, see .
Memphis is a city in the southwest corner of Tennessee, and the county seat of Shelby County. Memphis rises above the Mississippi River on the 4th Chickasaw Bluff just below the mouth of the Wolf River. and Bowling Green, Kentucky Bowling Green is the fourth-most populous city in the U.S. state of Kentucky after Louisville, Lexington and Owensboro, with an estimated "population" in 2006 of 53,112. It is the county seat of Warren County and the principal city of and is included in the Bowling Green, Kentucky telecommunications is enhancing access to equipment and the dissemination of test results, including results from Medical Resonance Imaging (MRI 1. (application) MRI - Magnetic Resonance Imaging.
2. MRI - Measurement Requirements and Interface. ) equipment and EKGs, among medical facilities and practitioners, using fiber-optic links and fax machines . Hospitals in St. Louis and Houston have conducted tests in which X-ray and other images are shared among professionals both inside and outside of the facilities using standard telephone lines. Other trials of telecommunications applications for image transfer, data transfer, and consultation are being conducted or planned in Massachusetts and North Carolina North Carolina, state in the SE United States. It is bordered by the Atlantic Ocean (E), South Carolina and Georgia (S), Tennessee (W), and Virginia (N). Facts and Figures
Area, 52,586 sq mi (136,198 sq km). Pop. .
The ability to transfer medical information, including images, and to engage in consultation is encouraging the application of telecommunications to the remote practice of medicine. This enhances access to advanced medical care for many Americans in medically under serviced areas, such as inner cities and rural areas . In Texas, three networks, KARENET, INTERNET, and MEDNET MEDNET Medical Systems Network , use various communications technologies Noun 1. communications technology - the activity of designing and constructing and maintaining communication systems
engineering, technology - the practical application of science to commerce or industry to distribute information, conduct conferences, and link specialists with patients and medical practitioners in remote rural areas . In North Dakota North Dakota, state in the N central United States. It is bordered by Minnesota, across the Red River of the North (E), South Dakota (S), Montana (W), and the Canadian provinces of Saskatchewan and Manitoba (N). , fiber-optic systems are used to retrain re·train
tr. & intr.v. re·trained, re·train·ing, re·trains
To train or undergo training again.
re·train displaced farmers to find new careers in the field of medical services .
Controlling Costs via Telecommunications
Not only have telecommunications been involved in improving the quality and availability of U.S. medical care, but also in improving service efficiency and controlling costs. Many such applications involve improvements in administrative efficiency. In Connecticut, a subsidiary of Blue Cross and Blue Shield Blue Shield A US not-for-profit health care insurer that is a reimbursement intermediary for physicians. Cf Blue Cross. deployed the first state-wide electronic insurance claims and medical management network in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. . Currently receiving 20% of its claims electronically, the subsidiary has consequently cut $300,000 in annual costs . The practice of remote medicine also cut costs by using specialists and facilities more effectively. In suburban Philadelphia, a clinic transmits X-ray images via satellite to University of Pennsylvania (body, education) University of Pennsylvania - The home of ENIAC and Machiavelli.
Address: Philadelphia, PA, USA. Hospital radiologists. In enhancing access, the transmissions also reduce diagnostic costs to the clinic, which does not need to maintain a radiologist radiologist /ra·di·ol·o·gist/ (ra?de-ol´ah-jist) a physician specializing in radiology.
Radiologist on site.
Aggregate Telecommunications Usage in the Health Services health services Managed care The benefits covered under a health contract Sector
The overview above indicates that the medical services sector has exploited the increased availability of advanced telecommunications services. We now summarize sum·ma·rize
intr. & tr.v. sum·ma·rized, sum·ma·riz·ing, sum·ma·riz·es
To make a summary or make a summary of.
sum patterns in the health care sector's overall usage of telecommunications services from 1963 to 1991. Over this interval, the health care services industry increased its real (1991 dollar) telecommunications usage, expressed as total expenditures on telecommunications services, more than sixfold sixfold
1. having six times as many or as much
2. composed of six parts
by six times as many or as much
Adj. 1. , increasing from $482 million in 1963 to $2.97 billion in 1991, representing an annual rate of growth of 6.71%. More important than the growth in the level of telecommunications usage, however, is the growth in that usage relative to the total output of the health care sector. In 1963, for every dollar of health care output, the industry spent 0.81 cents on telecommunications services. This usage increased to 1.33 cents by 1991, representing an annual growth rate of 1.77%. While this increase is substantial, related research conducted by DRI See Digital Research. has shown that the average U. S. industry increased its relative usage of telecommunications by 3.0% per year with a standard deviation In statistics, the average amount a number varies from the average number in a series of numbers.
(statistics) standard deviation - (SD) A measure of the range of values in a set of numbers. of 2.2 percentage points across a total of 36 individual sectors examined. In this context, health care's usage of telecommunications increased at a statistically reasonable rate. The health care sector has thus utilized telecommunications services for a number of innovative purposes, yet the growth in overall telecommunications usage lags, to some degree, economy-wide telecommunications usage growth. We next examine the input structure of the health care services industry and begin to account for production decisions that have increased levels of telecommunications usage.
III. The Calculation of Cost Savings Due to Advances in Telecommunications Services Production and Use: Methodology and Data
In this section we quantify Quantify - A performance analysis tool from Pure Software. the direct savings to health care providers attributable to reductions in the relative price of telecommunications and its substitution for more costly inputs. To conduct its analysis, DRI constructed a "translog" econometric model of health care costs covering doctor and dentist dentist /den·tist/ (den´tist) a person with a degree in dentistry and authorized to practice dentistry.
A person who is trained and licensed to practice dentistry. services, hospitals, nursing and personal care, and other medical services.(2)
The Translog Function
A wide variety of functional forms have been applied to the analysis of production and cost relations. Among the most popular forms used in current research is the "translog," a function that may be taken as a second-order approximation approximation /ap·prox·i·ma·tion/ (ah-prok?si-ma´shun)
1. the act or process of bringing into proximity or apposition.
2. a numerical value of limited accuracy. to a large family of forms and that imposes no a priori a priori
In epistemology, knowledge that is independent of all particular experiences, as opposed to a posteriori (or empirical) knowledge, which derives from experience. restrictions on estimated elasticities. A translog cost function is typically specified as:
[Mathematical Expression A group of characters or symbols representing a quantity or an operation. See arithmetic expression. Omitted]
where C represents optimized cost, y is output, t signifies a time variable, and [g.sub.ij] = [g.sub.ji] and [w.sub.i], [w.sub.j] represent input prices.
For a cost function specification to be consistent with microeconomic mi·cro·ec·o·nom·ics
n. (used with a sing. verb)
The study of the operations of the components of a national economy, such as individual firms, households, and consumers. theory, costs should be increasing in output and factor prices. Cost functions must also be linearly homogeneous The same. Contrast with heterogeneous.
homogeneous - (Or "homogenous") Of uniform nature, similar in kind.
1. In the context of distributed systems, middleware makes heterogeneous systems appear as a homogeneous entity. For example see: interoperable network. in factor prices. For the translog cost function, this implies:
[summation summation n. the final argument of an attorney at the close of a trial in which he/she attempts to convince the judge and/or jury of the virtues of the client's case. (See: closing argument) of] i[b.sub.i] = 1, [summation of] i[g.sub.ij] = [summation of] i[g.sub.ii] = [summation of] i[g.sub.iy] = 0. (2)
Estimating the Parameters of the Translog Model
With reference to the equations above and to the material to follow, let:
(a) [w.sub.1] = [w.sub.k] = the price of capital,
(b) [w.sub.2] = [w.sub.1] = the price of labor,
(c) [w.sub.3] = [w.sub.m] = the price of materials,
(d) [w.sub.4] = [w.sub.p] = the price of telecommunications services.
The translog cost model may be estimated using single equation procedures, but gains in efficiency may be achieved through further manipulations. Following the steps outlined by Berndt , consider a differentiation of the cost function:
d ln C/d ln [w.sub.i] = ([w.sub.i]/C)(dC/d[w.sub.i]). (3)
But the derivative of the optimized cost function with respect to factor price is the corresponding factor demand, [x.sub.i]. Substituting this value establishes:
d ln C/d ln [w.sub.i] = [w.sub.i][x.sub.i]/C = nominal cost share of factor i. (4)
Cost share equations for k, l, m, and p can then be established:
[S.sub.k] = [b.sub.k] + [g.sub.kk] ln[w.sub.k] +[ g.sub.kl] ln [w.sub.l] + [g.sub.km] ln [w.sub.m] + [g.sub.kp] ln [w.sub.p] + [g.sub.ky] ln y + [g.sub.kt] t(5)
[S.sub.l] = [b.sub.l] + [g.sub.lk] ln [w.sub.k] + [g.sub.ll] ln [w.sub.l] + [g.sub.lm] ln [w.sub.m] + [g.sub.lp] ln [w.sub.p] + [g.sub.ly] ln y + [g.sub.lt] t (6)
[S.sub.m] = [b.sub.m] + [g.sub.mk] ln [w.sub.k] + [g.sub.ml] [ln.sub.wl] + [g.sub.mm] ln [w.sub.m] + [g.sub.mp] ln [w.sub.p] + [g.sub.my] ln y + [g.sub.mt] t(7)
[S.sub.p] + [b.sub.p] + [g.sub.pk] ln [w.sub.k] + [g.sub.pl] [w.sub.n] [w.sub.l] + [g.sub.pm] ln [w.sub.m] + [g.sub.pp] ln [w.sub.p] + [g.sub.py] ln y + [g.sub.pt] t. (8)
Such a system of cost and share equations may be efficiently estimated using "seemingly unrelated regression In econometrics, seemingly unrelated regression (SUR), model developed in Zellner (1962), is a technique for analyzing a system of multiple equations with cross-equation parameter restrictions and correlated error terms. " methods proposed by Zellner . To perform the estimation estimation
In mathematics, use of a function or formula to derive a solution or make a prediction. Unlike approximation, it has precise connotations. In statistics, for example, it connotes the careful selection and testing of a function called an estimator. , it is necessary to remove one factor share equation, expressing the prices in the remaining share equations as price relatives with the denominator denominator
the bottom line of a fraction; the base population on which population rates such as birth and death rates are calculated.
denominator being the price of the factor whose share equation has been removed. The parameters of the removed equation may be recovered through the use of the homogeneity Homogeneity
The degree to which items are similar. restrictions.
Data Used in Estimating the Translog Cost Function
Data were drawn from private and nonprofit A corporation or an association that conducts business for the benefit of the general public without shareholders and without a profit motive.
Nonprofits are also called not-for-profit corporations. Nonprofit corporations are created according to state law. health care providers and establishments and thus does not include data on costs from government operated facilities. Percentage cost savings attributable to telecommunications technological advances, price reductions, and enhanced usage of telecommunications realized by private/nonprofit health care providers were imputed Attributed vicariously.
In the legal sense, the term imputed is used to describe an action, fact, or quality, the knowledge of which is charged to an individual based upon the actions of another for whom the individual is responsible rather than on the individual's to the health care segment of government activities. This was done on the assumption that governmental health care providers produce services in a manner similar to those in the private sector, or at least realize gains from telecommunications advances at a similar rate. (Public health care delivery amounts to roughly one quarter of the total output of the private and nonprofit health care service sector.)
Data on government expenditures, purchases, and receipts for health care services were drawn from the National Income and Product Accounts National Income and Product Accounts (NIPA) use double-entry accounting to report the monetary value and sources of output produced in a country and the distribution of incomes that production generates. Data are available at the national and industry level. of the United States . Health care costs are expressed as a function of prices, output, time, and interactions among these variables. The analysis implicitly embeds information about potential alternative technologies of applying inputs to obtain health care service, and how these technologies change over time. As prices of the inputs change, total costs change not only because prices differ but also because when input prices change relative to one another, the mix of inputs used by producers also tends to change. The cost equation determined by DRI captures the combined immediate effect of price changes on costs and the subsequent effect of those price changes on input mix and the influence of such shifts on costs.
Information on average labor compensation was taken from the U. S. Department of Commerce, Bureau of Economic Analysis (BEA BEA - Basic programming Environment for interactive-graphical Applications, from Siemens-Nixdorf. ) and the U. S. Department of Labor, Bureau of Labor Statistics Bureau of Labor Statistics (BLS)
A research agency of the U.S. Department of Labor; it compiles statistics on hours of work, average hourly earnings, employment and unemployment, consumer prices and many other variables. (BLS See Bureau of Labor Statistics. ). Capital usage is defined as depreciation on all capital assets capital assets n. equipment, property, and funds owned by a business. (See: capital, capital account) and is taken from the BEA "Detailed Investment by Industry" database. Telecommunications share figures were drawn from an interindustry model and databank maintained by DRI.
Analysis of the cost structure of the health care services industry reveals that in nominal terms, an increasingly greater share of overall costs have been devoted to labor costs, which rose from 46% of total costs in 1963 to 62% in 1991. Capital and materials costs each declined over the same interval, falling 27% and 28% respectively. Significantly, the nominal share of telecommunications costs fell nearly two-thirds from 1963 to 1991. As will be discussed later, this is primarily the result of large relative telecommunications price declines. When these cost shares are expressed in real terms, however, we note greater stability in the share of total costs accounted for by each input. Therefore, while each input's real share of total cost has not changed at all since 1963, increases in the relative price of labor have increased labor's nominal share of total costs by 33%, or 1% per year. Labor costs have crowded out health care services' incorporation of capital, materials, and telecommunications. This observation will be discussed at greater length and in the context of cost savings due to telecommunications usage in section III below.
IV. The Calculation of Cost Savings Due to Advances in Telecommunications Services Production and Use: Results
Table I, below, presents the parameters as statistically estimated by the translog system of equations described above. The table presents the estimated coefficients and their level of statistical significance.(3)
In evaluating goodness of fit Goodness of fit means how well a statistical model fits a set of observations. Measures of goodness of fit typically summarize the discrepancy between observed values and the values expected under the model in question. Such measures can be used in statistical hypothesis testing, e. statistics, recall that the coefficients of the factor share equations of translog systems are constrained con·strain
tr.v. con·strained, con·strain·ing, con·strains
1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force.
2. to equal associated parameter (1) Any value passed to a program by the user or by another program in order to customize the program for a particular purpose. A parameter may be anything; for example, a file name, a coordinate, a range of values, a money amount or a code of some kind. values in the jointly estimated cost function. Also, note that the estimation process produces the parameters associated with minimum system-wide error, not necessarily those associated with minimum error for any individual equation in the system. In spite of these restrictions, each of the four equations (one cost and three share) estimated for the health services industry have associated [Mathematical Expression Omitted] statistics of at least 0.92. In addition, the parameter estimates typically exhibit strong t-statistics and provide an excellent foundation for the general analytical applications discussed in this article.
Table I. Translog Model Parameters Equation Coefficient Capital Share Labor Share TC Share Constant 0.0867(**) -0.1512 0.0472(**) Price of Capital 0.0065(*) -0.0075(**) -0.0008 Price of Labor -0.0075(**) 0.1593(**) -0.0090(**) Price of Telco. -0.0008 -0.0090(**) 0.0101(**) Log of Output -0.0196(**) 0.2016(**) -0.0106(**) Time 0.0002(**) -0.0017(**) 0.0001(**) [Mathematical Expression Omitted] 0.92 0.95 0.98
Calculation of Actual Savings Realized from 1963 to 1991
Once the cost equation and associated input share equations were statistically determined, a simulation was conducted in which health service providers in every year from 1963 to 1991 were constrained to confront the telecommunications relative prices that held in 1963. The percentage difference between costs determined by actual historical prices and simulated costs determined by historical and constrained telecommunications prices were then applied to historical costs to determine health care providers' direct cost savings attributable to reductions in price and improvements in the technology of telecommunications services.
DRI concludes that if the telecommunications technology had not advanced since 1963, direct health care costs would have been measurably higher in every year since 1965. Annual savings in health care expenses due to telecommunications advances from 1963 have reached or exceeded 0.5% of total costs since 1974, and have reached or exceeded 1% of total costs since 1980. By 1991 the total costs of private and nonprofit health care service provision (the sum of purchased materials, labor compensation, depreciation of capital assets, and telecommunications expenses) reached $413.5 billion; public health care services purchased by governments amounted to an additional $115.1 billion. Had telecommunications technology not advanced since 1963, DRI determines that those combined costs would have been $7.4 billion greater. In addition, DRI has calculated the cumulative direct cost saving in health care service provision due to advances in telecommunications production and health care consumption for each year from 1963 to 1991. These savings totaled $71.0 billion in 1991 dollars.
Table II. Health Care Cost Savings from Telecommunications Advances (Billions of current dollars) Additional Costs had Telecommunications 1991 Costs not Advanced Private Health Care Costs $413.5 $5.8 Public Health Care Costs 115.1 1.6 Total 528.6 7.4 Source: Bureau of Labor Statistics. Bureau of Economic Analysis, various publications.
Governments directly purchase health care services, primarily through construction and operation of health care facilities. Increasingly, however, governments are financing health care consumption through transfers, grants, and subsidies. Total net government expenditures--the sum of direct purchases, transfer payments, grants-in-aid, and subsidies, less service receipts and surplus from government enterprises--have been rising rapidly both in absolute terms (Alg.) such as are known, or which do not contain the unknown quantity.
See also: Absolute and relative to other government expenditures. The proportion of these expenditures compared with total government expenditures is shown in Figure 5. Assuming government expenditures would be proportionately pro·por·tion·ate
Being in due proportion; proportional.
tr.v. pro·por·tion·at·ed, pro·por·tion·at·ing, pro·por·tion·ates
To make proportionate. affected by cost savings in a given year, DRI calculates that had there been no advances in telecommunications production or in consumption of telecommunications services by health care services from 1963 to 1991, government health care expenditures would have been $42.1 billion greater.
Telecommunications and Unrealized Prospective Cost Savings in Health Care
The preceding analyses determined historically realized cost savings from realized advances in telecommunications production and the applications of telecommunications as a cost-effective substitute in health care services. However, it is likely that the full potential of telecommunications as a substitute for more expensive inputs and processes has not yet been realized.
As described above, the cost savings due to telecommunications advances arise for two reasons. First, technological change in the telecommunications services sector causes absolute telecommunications prices to be lower than otherwise. Because telecommunications has been an input in the provision of health care services, the fact that this input may be purchased more cheaply than would have been possible without progressive technological change creates cost savings. Technological change in telecommunications, however, also caused telecommunications prices to fall relative to other input prices. In general, a reduction in the relative price of an input will induce substitution of the input for more costly inputs. This price-induced substitution of telecommunications for relatively more expensive inputs is the second reason for historical savings in health care costs as a result of advances in telecommunications production and consumption. Let us assess in greater detail these substitution phenomena.
The real substitution of telecommunications inputs for other inputs is reflected in the growth, over time, of the proportion of real telecommunications consumption to real health care output. The movement of this ratio reflects the movement of telecommunications' share of health care costs. As described briefly in section I above, while the national average growth in "telecommunications intensity" for all industries from 1963 to 1991 was 3.0% per year, the health care services industry increased its intensity of usage by only 1.77% per year. The cause of this slow rise in the telecommunications intensity of health care services is not clear, but may result from three related matters: First, the particular characteristics of the health care production process may limit the extent to which telecommunications may be employed as an input. Second, the health care sector may be somewhat slow to adapt technologies not immediately connected with patient care. Third, provider reimbursement Reimbursement
Payment made to someone for out-of-pocket expenses has incurred. policies may discriminate dis·crim·i·nate
v. dis·crim·i·nat·ed, dis·crim·i·nat·ing, dis·crim·i·nates
a. against the recovery of telecommunications costs.
It seems likely that health care providers have not responded as quickly as they might have to cost signals in adopting cost-reducing telecommunications technologies. We have touched on only a few of the possible factors that have driven this trend. Clearly, additional inquiry into the dynamics shaping the health care sector's adoption of advanced telecommunications would be useful to policy makers. Testimony presented before the U. S. House of Representatives Subcommittee sub·com·mit·tee
A subordinate committee composed of members appointed from a main committee.
Noun on Telecommunications and Finance in March 1993, supports the importance of such prospective research. During those hearings, government officials and health care specialists agreed that the health care sector could and should exploit new telecommunications technologies by underwriting Underwriting
1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).
2. The process of issuing insurance policies. dozens of cost-reducing, quality-enhancing projects. In addition, as discussed in greater detail below, researchers have shown that health care providers have foregone a range of possible telecommunications applications that might have saved the 1990 economy over $36 billion, yielding net savings of $20 billion.
As we pursue an explanation of the relatively slow substitution of telecommunications for more costly inputs, we examine the translog-derived Allen partial elasticities of substitution between pairs of inputs. Unlike the ratio of substitution between two inputs, which describes the amount of one input that can be saved as a result of investing one additional dollar in another input, the partial elasticity of substitution Elasticity of substitution is the elasticity of the ratio of two inputs to a production (or utility) function with respect to the ratio of their marginal products (or utilities). Mathematical definition
Let the utility over consumption be given by describes the rate at which a ratio of real input pairs will change in response to changes in the relative prices of the two inputs. High elasticities of substitution between a pair of inputs will indicate the presence of high substitution possibilities.
It is significant that the partial elasticities of substitution between each input (capital, labor, and materials) and telecommunications are much closer to zero for health care than for almost all other sectors of the economy. In health care, the elasticity of substitution between labor and telecommunications, -0.2, while indicative of a slightly complementary relationship, is also relatively low, and describes a production technology that does not create rapid substitution possibilities between inputs. In particular, the elasticity of substitution between capital and telecommunications in health care is estimated at 3.7, a value that is relatively high, but fully 77% lower than the economy-wide average of 16.2. This indicates, for example, that the average industry responds to a 1% change in the price of capital relative to telecommunications by making a 16% substitution of telecommunications for capital, while the health services sector makes only about a 4% substitution. By contrast, two similarly structured service industries that have been investigated in other DRI research, business services and personal services personal services n. in contract law, the talents of a person which are unusual, special or unique and cannot be performed exactly the same by another. These can include the talents of an artist, an actor, a writer, or professional services. , have been found to have elasticities of substitution between capital and telecommunications of 17.9 and 10.9, respectively. Therefore, although the substitution of telecommunications for other inputs has generated substantial cost savings, the relative inelasticity in·e·las·tic
Lacking elasticity; unyielding or unadaptable. See Synonyms at stiff.
ine·las·tic of substitution between capital and telecommunications has forestalled even greater cost savings.
The specific characteristics of technologies applied in health care provision, then, may be the reason that telecommunications intensity, while growing recently in health care services, has grown more slowly in this industry than in others. Evidence from detailed health care operations research operations research
Application of scientific methods to management and administration of military, government, commercial, and industrial systems. It began during World War II in Britain when teams of scientists worked with the Royal Air Force to improve radar detection of suggests, however, that there are cost-effective technologies that have not been applied in the provision of health care services. DRI research results, presented below, evaluate the independent findings of previous analysis to determine potential unrealized savings from unapplied but available technologies involving greater substitution of telecommunications for other inputs.
A recent study has concluded that telecommunications could substitute for specific and substantial amounts of costly inputs . The value of inputs telecommunications could yet effectively substitute for was calculated to be $36 billion (1990 dollars), of which almost $30 billion would arise from electronic management and transmittal of patient information, nearly $6 billion from electronic submission and processing of health care claims, about $600 million from electronic inventory management and controls, and some $200 million from video conferencing See videoconferencing.
(communications) video conferencing - A discussion between two or more groups of people who are in different places but can see and hear each other using electronic communications. for professional training and remote medical consultation . The study did not estimate the telecommunications costs that would be required to substitute for the replaced resources .
However, the DRI translog health care cost model presents a mechanism for analyzing interrelated in·ter·re·late
tr. & intr.v. in·ter·re·lat·ed, in·ter·re·lat·ing, in·ter·re·lates
To place in or come into mutual relationship.
in factor input demands in the provision of health care. DRI estimates that in 1990 a dollar of telecommunications service input could be substituted for about $2.30 in combined labor, capital, and materials (goods and services). Consequently, the telecommunications costs associated with the substitution of $36 billion in other inputs would be $15.65 billion. Therefore, the net savings associated with proposed applications of existing telecommunications technology would have reduced 1990 health care costs by $20.35 billion. According to the Congressional Budget Office (CBO CBO
See: Collateralized Bond Obligation. ), health care costs excluding prescription drugs prescription drug Prescription medication Pharmacology An FDA-approved drug which must, by federal law or regulation, be dispensed only pursuant to a prescription–eg, finished dose form and active ingredients subject to the provisos of the Federal Food, Drug, and other nondurables was $611 billion that year . The $20.35 billion in potentially realizable savings thus amounted to 3.33% of health care expenditures (excluding prescription drugs and nondurables). These findings are summarized in Table III.
Table III. Potential Savings if More Telecommunications Had Been Substituted for More Costly Inputs (1990) Billions of current dollars Health Care Costs (CBO) $611.0 Unrealized Potential Substitutions $36.0 Net Savings Had Substitutions Occurred $20.35 Percent of Total Costs 3.33% Source: Lemieux and Williams ; Arthur D. Little, Inc., . Table IV. CBO Projections of Health Care Costs and DRI Estimates of Savings, Assuming Full Adoption of Existing Technology: Savings Rate of 3.33% (Billions of current dollars) 1995 2000 U.S. Health Care Costs $994.0 $1,568.0 Potential Savings $33.1 $52.2
The CBO forecasts health care expenditures to rise to $994 billion (current dollars) in 1995 and reach $1.568 trillion (current dollars) by the year 2000. Thus, on the assumption that savings in the future will be in the same proportion as in 1990, potential applications of existing telecommunications technology could save the U. S. economy $33.1 billion in 1995 and $52.2 billion in 2000. These results are summarized in Table IV.
These calculations assume that further advances in telecommunications will not further reduce telecommunications prices relative to the prices of other inputs. This is a very conservative assumption, given that over the last three decades telecommunications prices have grown much more slowly than almost all other input prices.
If, however, the assumptions above were modified slightly to reflect recent historical trends in telecommunications relative prices and real telecommunications usage in health care, estimates of cost savings that could be achieved through more intensive use of existing telecommunications technologies would be substantially higher. In order to perform this calculation, it would be necessary to establish: 1) the rate at which nominal expenditures for labor, capital, and materials could be replaced per nominal dollar expenditure in telecommunications services by the year 2000, and 2) the rate at which health care costs would grow through the year 2000.
First, due to telecommunications' steadily declining relative prices, the substitution ratio between telecommunications and other inputs rose steadily between 1982 and 1991. If this trend is extended in a linear fashion to the year 2000, the amount of inputs for which a dollar of telecommunications expenditure could substitute would be 37% higher than the 1991 level. Second, if cost forecasts projected by the CBO apply to the inputs for which telecommunications may potentially be substituted, applications of telecommunications technology (which could have substituted for $36 billion in 1990 health care costs) would substitute for $92.4 in health care costs by the year 2000. On this basis, the application of existing telecommunications technologies could reduce U. S. health care costs in the year 2000 by $63.05 billion, or 4.02%.
We have described DRI's application of econometric e·con·o·met·rics
n. (used with a sing. verb)
Application of mathematical and statistical techniques to economics in the study of problems, the analysis of data, and the development and testing of theories and models. techniques to estimate telecommunications services' contributions to cost savings in the health care sector. While the cost savings have been substantial, evidence suggests that further cost savings may be possible. The research in this paper provides policy makers with a better understanding of health care costs and the extent to which further adoption of telecommunications in the provision of health care services might affect industry costs in the future.
1. Ideas presented at a series of hearings conducted before the U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Telecommunications and Finance, 19 January to 31 March 1993.
2. For more detailed discussion of the specification and properties of the translog cost function, see Cronin, et al. .
3. The following symbols are used to denote de·note
tr.v. de·not·ed, de·not·ing, de·notes
1. To mark; indicate: a frown that denoted increasing impatience.
2. statistical significance: "*" indicates significance at the 95% confidence level, and "**" indicates significance at the 99% confidence level. Because the cost equation is specified with over 20 explanatory ex·plan·a·to·ry
Serving or intended to explain: an explanatory paragraph.
ex·plan variables, to conserve space, parameter statistics are not displayed; r-bar squared for the cost equation, however, is estimated at 0.94.
1. Arthur D. Little Arthur D. Little, Inc. is the world's first management consulting firm. Founded in 1886 by Arthur Dehon Little, an MIT chemist who discovered acetate, and co-worker Roger Griffin, in Cambridge, Massachusetts, Arthur D. Little pioneered the concept of contracted technology research. Inc., "Can Telecommunications Help Solve America's Health Care Problems?" Arthur D. Little Inc., Reference 91810-98, July 1992.
2. Berndt, Ernst. The Practice of Econometrics econometrics, technique of economic analysis that expresses economic theory in terms of mathematical relationships and then tests it empirically through statistical research. . Boston: Addison-Wesley, 1991.
3. Bureau of Economic Analysis. National Income and Product Accounts of the United States, Vol. 2, 1959-88. Washington: U.S. Government Printing Office, September 1992, Tables 3.9A, 3.9B, 3.16, 3.17.
4. Council of Economic Advisors. Economic Report of the President The Economic Report of the President is a document published by the President of the United States' Council of Economic Advisers (CEA). Released in February of each year, the report reviews what economic activity was of impact in the previous year, outlines the economic goals for . U.S. Government Printing Office, February 1991, p. 137.
5. Cronin, Francis J., Elisabeth K. Colleran, Paul L. Hebert, and Steve Lewitzky, "Telecommunications and Growth: The Contribution of Telecommunications Infrastructure Investment to Aggregate and Sectoral Productivity." Telecommunications Policy, November 1993.
6. Cronin, Francis J., Mark A. Gold, Paul L. Hebert, and Steve Lewitzky, "Factor Prices, Factor Substitution, and the Relative Demand for Telecommunications Across U.S. Industries." Information Economics and Policy, No. 5, 1993.
7. Lemieux, J. and C. Williams. Projections of National Health Expenditures. Washington: Congressional Budget Office, October 1992 page xii.
8. McGinnis, J. Michael, M.D., Public Health Service, U.S. Department of Health and Human Services Noun 1. Department of Health and Human Services - the United States federal department that administers all federal programs dealing with health and welfare; created in 1979
Health and Human Services, HHS , 23 February 1993, testimony before the House Subcommittee on Telecommunications and Finance, 19 January 1993.
9. National Telecommunications and Information Administration The National Telecommunications and Information Administration (NTIA) is an agency of the United States Department of Commerce that serves as the President's principal adviser on telecommunications policies pertaining to the United States' economic and technological . NTIA NTIA National Telecommunications & Information Administration
NTIA National Telecommunications & Information Association
NTIA National Telecommunications Interagency
NTIA National Telecommunications and Information Administration Telecom 2000. Washington: U.S. Government Printing Office, October 1988, p. 108.
10. National Telecommunications and Information Administration. Telecommunications in the Age of Information. Washington: U.S. Government Printing Office, October 1991, p. 67.
11. Weisbrod, Burton, "The Health Care Quadrilemma: An Essay on Technological Change, Insurance, Quality of Care, and Cost Containment cost containment,
n the features of a dental benefits program or of the administration of the program designed to reduce or eliminate certain charges to the plan. ." Journal of Economic Literature, June 1991.
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