Health care costs have an incurable disease

Street Smarts. By Scott Gottlieb, MD, AMNews contributor. Feb. 12, 2001.

STREET SMARTS

A column looking at the corporate side of health care

SEE ARCHIVES

Health care costs appear to be coming down with a sickness, one that is presenting as the return of inflation that managed care was supposed to cure. The diagnosis: "Baumol's disease."

William Baumol, PhD, a New York University economics professor who turns 79 on Feb. 26, is one of those rare economists whose principles have been borne out in the real world. His most famous principle, developed in the 1960s and known as Baumol's disease, says that because productivity in the labor-intensive service sector tends to lag behind manufacturing, costs in service-related businesses end up increasing over time.

That's mainly because salaries in the labor-intensive service sector have to keep up with salaries in more productive industries.

The kinds of jobs in which productivity does not increase much at all, particularly education, sanitation and policing, wind up being subsumed by the government because they become too expensive for the private sector to manage profitably.

In health care, the import of Dr. Baumol's work is double-edged. On the one hand, if the effect of the disease in the service sector is relentless and inevitable, there's nothing much to be done. Moreover, Baumol's principles hold that new technologies in health care, unlike productivity-increasing technologies in industries such as banking or insurance, will only add to costs and consume more of a doctor's time.

It is here that we begin to understand how so many health care initiatives failed to produce the efficiencies and cost savings that Wall Street analysts predicted. [...]