Cost of health care

The New York Times  had a nice summary of what is known as Baumol’s cost disease for an explanation of why health care costs will always rise faster than inflation.  The explanation is quite elegant in my opinion and can also explain why costs for education and arts will also keep increasing at a rapid rate.  The example Baumol (and his colleague Bowen) use is that it takes the same number of people to play a Mozart string quartet as it did in the 18th century and yet musicians are paid so much more now.  Hence, the cost of music has increased with no corresponding increase in productivity.  Generally, wages should only increase because of a net gain in productivity.  Hence, a manufacturing plant  today has far fewer people than a century ago but they get paid more and produce more.  However, a violinist today is exactly the same efficient as she was a century ago.  Baumol argued that it was competition with other sectors of the economy that allowed the wages of artists to go up.  If you didn’t give musicians a living wage then there would be no musicians.

Applied to the health care industry, the implication is that medicine is just as labour intensive  and no more productive as it was before yet the salaries keep going up.   I think this is not quite correct and it is the complement or corollary of cost disease, which I’ll call productivity disease, that is the culprit for health care cost increases.  Health care is substantially more productive and efficient than before but this increase in productivity does not decrease cost but increases it.  For example, consider the victims of  a car crash.  Fifty years ago, they would probably just die and there would be no health care costs.  Now, they are evacuated by emergency personnel who resuscitate them on the way to hospital where they are given blood transfusions, undergo surgery, etc.  If they survive, they may then require months or years of physical therapy, expensive medication and so forth.  The increase in productivity leads to more health care and an increase in cost.  Hence, the better the health care industry gets at keeping you alive, the more expensive it becomes.

I feel that the panic over the rapid increase in health care costs is misplaced.  Why shouldn’t a civilized society be spending 90% of its GDP on health care?  After all, what is more important,  being healthy or having a flat screen TV?  I do think that eventually, cost disease or productivity disease, will saturate.  Perhaps we are at the steepest part of the cost curve right now because our health care system is good at keeping people alive but does not make them well enough so that they don’t need extended and expensive care.  If technology increased to the point that illness and injury could be treated instantly then costs would surely level off or even decrease.  For example, a minor cut a century ago could lead to a severe infection that could require hospitalization,  expensive treatment and result in death.  Now, you can treat a cut at home with some antibiotic ointment and a bandage.   We can certainly try to restrain some abuses and overuse of the health cares system by changing the incentive structure but perhaps we should also accept that a continuous increase in health care costs is inevitable and even desirable.

4 thoughts on “Cost of health care

  1. I think the logical conclusion of your argument is some version of the ‘quality-adjusted life year’ system of the NHS. At some point, keeping a person alive for the sake of keeping them alive becomes morally neutral at best. We all have our personal line, but I think everyone has their own line where extraordinary measures become too extraordinary.

    Yes, when comparing a flat screen tv to a persons life, the flat screen tv will lose out in almost every moral consideration. There are some more murky examples. Take, for example, improving a child’s diet versus some medical measure to keep someone alive for another month. A poor diet in childhood has been shown to damage quality of life for a person for the rest of their life. How much quality of life over an entire lifetime are we willing to sacrifice to have another person live for another month? another week?

    Even if costs do not organically level off, I think everyone has a number (not necessarily computable, but a theoretical proportion of GDP) above which medical spending becomes unnecessarily expensive. The problem, as I see it, is that everyone has a (potentially) different number.


  2. >The problem, as I see it, is that everyone has a (potentially) different number.

    I don’t see this as a particular problem either. People for whom the number is greater should just buy more expensive insurance plans.


  3. Daniel,

    Well, given that we’re wasting at least 40% of our food right now (see I don’t think we’re close to having to trade-off between saving lives and food. However, I get your point but I think you’re still premising on us having to control health care costs. Perhaps we need to rethink that completely. An economy based entirely on health care may not be so bad.


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