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One possible approach to containing Medicare costs involves explicit changes in Medicare's coverage policy with respect to medical technology. This paper first describes the development and diffusion of medical technology in general and then describes how technologies are identified, assessed, and approved for payment by Medicare. Currently, cost is neither a criterion nor an explicit issue in coverage decisions, although coverage policy is an integral part of payment policy. A combination of policies to reduce the rates of adoption and use of certain technologies is needed--including cost considerations in technology assessments for coverage decisions, limiting diffusion of technology to certain providers and sites, limiting utilization to certain indications, and tightening administrative processes. Finally, the interaction between coverage policy and DRG payment needs to be explored more thoroughly.

Medical technology has become a controversial national policy issue, largely because of rapidly rising national health expenditures and their relation to medical technology. These costs are increasingly viewed in relation to benefits or effectiveness. Attempts to control medical technology, to consider benefits in relation to costs, have largely been regulatory, and have failed to ameliorate cost rises. This failure has stimulated consideration of the reimbursement system as a controlling device. The Medicare program already has developed a rather formal process for making reimbursement decisions based on technology assessments. However, fundamental reform of the reimbursement system seems necessary to counter perverse incentives built into payment. Recent proposals to shift to prospective payment is an example of such a change. However, the basically private nature of the health care system and the limited leverage of the Medicare program limits the power of the federal government to make change.

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