Although the technological change in medicine has been recognized widely as the major driver of rising healthcare costs, there is very little research that estimates this effect directly. This paper uses both a single-equation and a simultaneous equations approach to investigate empirically the interactive relationship between technological innovation and the growth of health expenditure in the context of the pharmaceutical market in Taiwan. Based on observing 182 therapeutic groups between 1997 and 2006, we find evidence to support the argument that technological innovation and health expenditure are determined simultaneously as technological innovation, and that the growth of health expenditure are endogenous rather than exogenous. Specifically, we find that therapeutic groups associated with higher pharmaceutical expenditure are likely to attract more new products to the market. Meanwhile, therapeutic groups with more new products are associated with higher pharmaceutical expenditures. An important implication of the paper is that cost containment policies will affect not only the growth of health expenditure, but also the progress of technological innovation in the health sector.
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