Technology and health expenditures: a demand approach applied to a process innovation

There is controversy among economists as to whether the diffusion of new medical technologies has been a contributing factor to rising health expenditures. The economic literature is critically reviewed and another approach is advocated. This alternative approach rests on the distinction between product and process innovations. It is argued that the relationship between process innovations and health expenditures can be illuminated by determining if the process innovation and the original procedure are utilized as substitutes. The empirical results provide no indication that alternative technologies for diagnosing diseases/conditions of the upper gastrointestinal tract have been utilized as substitutes by Australian medical practitioners operating on a fee-for-service basis. This study finds no evidence to indicate that the process innovation of fibre optic endoscopy has reduced health expenditures associated with diagnosis of diseases/conditions of the upper gastrointestinal tract.