The Cost Disease: Why Computers Get Cheaper and Heath Care Doesn’t
by William Baumol
Yale University Press, 2012
Reviewed by Carl Mercurio
Worried about rising healthcare costs? Rest easy.
William Baumol argues in The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t that healthcare costs will always increase at a faster rate than the overall economy because like many services industries healthcare is labor intensive–i.e., it resists the type of productivity growth found in sectors like manufacturing and agriculture.
That’s the bad news. The good news, Baumol says, is that we can afford to pay more for healthcare because we are paying less for everything else. Baumol is a professor at NYU Stern School of Business.
It’s an interesting argument that reminds me of comments from Douglas Elmendorf, director of the Congressional Budget Office, at a 2010 healthcare conference in Washington, DC: “We simply don’t have the ability…to change the growth rate.” Instead of using the phrase “bend the curve,” he said, CBO tends to talk about ways “to reduce spending without hurting health.”
Baumol lists all the usual suspects for outsized healthcare costs in the U.S., including waste, medical errors, unnecessary or inefficient treatments, fee-for-service payments, the emphasis on medical specialists, and medical liability. A variety of innovations, technologies and management initiatives can address these issues and reduce overall healthcare costs, he suggests, but it still won’t necessarily slow the rate of increase.
Now here’s a counter argument from Austin Frakt of The Incidental Economist: systematically addressing the use of inefficient treatments (i.e., interventions and technologies that are inappropriately applied or aren’t as effective as cheaper ones) will reduce the rate of growth in healthcare spending. Frakt also argues that Baumol too readily dismisses other potential cost drivers, like provider market concentration.
I don’t know who’s correct. (I struggle when the economic models come out). But even Frakt agrees that Baumol “has illustrated that it is at least possible that rapid growth in healthcare costs need not be viewed as the central problem or even a problem at all.”
If current trends continue, Baumol projects that by 2105 healthcare will account for 62% of gross domestic product per capita, compared to 15% in 2005. It sounds scary, but Baumol argues, “The only thing that will change, in terms of the cost to us, is how we will have to divide our money among these items.”
That said, Baumol offers a variety of caveats and hints at the type of profound policy implications the cost disease will pose. For starters, the cost disease disproportionately affects the poor, Baumol says. Furthermore, as government spending on services like healthcare rises, so does the threat of ill-advised calls for budget cuts and lower taxes–an approach Baumol says will needlessly cause society to suffer from self-inflicted wounds.
“Improvements to healthcare and education are hindered by the illusion that we cannot afford them,” Baumol writes. Or as he quotes from a Washington Post editorial: “The country has a lot of money. It’s only a question of how we choose to spend it.”