On Georgetown University’s McDonough School of Business Week: Cutting costs has benefits, but also hidden costs.
Yunan Ji, assistant professor of strategy at the McDonough School of Business, discusses this as it relates to health care.
Yunan Ji is an Assistant Professor of Strategy at the Georgetown University McDonough School of Business. Her research focuses on the design and regulation of health care markets and has been published in the Quarterly Journal of Economics, the New England Journal of Medicine, the Proceedings of the National Academy of Sciences, the Journal of the American Medical Association, among others. Ji is a Faculty Research Fellow at the National Bureau of Economic Research (NBER), a Research Associate at the Institute for Fiscal Studies (IFS) and has received research grants from the National Institute of Health (NIH). Ji received her Ph.D. in Health Policy and Economics from Harvard University in 2022 and her B.A. in Mathematics and Economics from Brown University in 2014.
The Hidden Cost of Health Care Cost-Cutting
Cost-cutting is a familiar tool for governments trying to ease budget pressures. But when it comes to healthcare, across-the-board cuts can have unintended and lasting consequences.
My co-author Parker Rogers and I look at a series of large Medicare price cuts for durable medical equipment—things like wheelchairs, oxygen machines, and glucose monitors. These are products that millions of Americans rely on at home. Over about a decade, Medicare slashed what it paid for them by over 60%, aiming to eliminate waste and save taxpayer money.
That might sound like good news for taxpayers—and in the short run, it was. But when we looked at more than 20 years of data, we uncovered a deeper, more troubling story: innovation collapsed. Patents fell by 80%. Fewer new devices came to market. Companies pulled back on research and development. Fewer new firms entered the industry. And to stay afloat, many manufacturers shifted to lower-cost production strategies—especially outsourcing to contract manufacturers.
That shift came with real consequences. Devices started breaking more often. Reports of malfunctions and injuries more than doubled—especially for products made by outsourced manufacturers.
What surprised us most is that the value of all this lost innovation may actually be bigger than the money Medicare saved. Price cuts delivered short-term budget relief, but at the cost of long-term progress and product quality. That’s a trade-off worth taking seriously.
Our takeaway isn’t that we should never cut healthcare spending. But we do need to be smarter about it. Rather than across-the-board cuts, policymakers should focus on areas with excess profits—places where savings won’t come at the expense of innovation and patient care.
Read More:
[National Bureau of Economic Research] – The Long-Run Impacts of Regulated Price Cuts: Evidence from Medicare
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