I am no economist. Some will likely howl in agreement, others knowingly nod their heads while tapping out their pipes so as to not get ash on their tweeds (them are the economists). I do know a good bit about health insurance, health care, and the rather messy intersection of the two. With that disclaimer/caveat, here goes my take on an esoteric economic theory.
Jason Shafrin’s post on Baumol’s cost disease was picked up by Kate Steadman for the latest Health Wonk Review – as a few other bloggers and commentors on Managed Care Matters had been bludgeoning me with this economic term, I figured I better find out what it is. So, here’s the definition.
Basically, it holds that when there is little or no growth in productivity the result is that unit costs tend to inflate. As docs and nurses can’t increase productivity as fast as it increases in other industries, prices have to go up faster to make up for that differential.
OK – I’m not sure I agree w Jason’s underlying premise – which seems to be predicated on clinician time as the key determiner of health care cost. What about technology adoption rates, the rise in pharmaceutical utilization and pricing, the aging population’s increased demand for services, etc. While I will grant that labor costs are a major driver of hospital expenses (see California’s minimum nurse staffing headaches), and hospital costs are one of the biggest influences on total medical expense, there are so many other factors that one cannot attribute the sickness of our system to one single factor.
I’d also point out that physician cost inflation has held relatively steady at about 7.7% for several years (although costs jumped last year due to higher Medicare utilization by docs) , while Rx and hospital costs have varied widely. And, as physician expense is s relatively small part of the overall health care cost equation, I don’t see how Baumol’s cost disease is the over-riding factor here.
That said, I certainly agree with Jason’s conclusion that health care costs will continue to grow as a percentage of individuals’ expenditures.
Mar
23
I think you are talking about two different kinds of “health care cost”.
Jason is concerned with something like “unit costs”. Labor is something north of 60% of a hospital’s total cost, and this does not count the docs. The Baumol effect plays a role in here, and also with physician fees. So some percentage of 60% could be attributed to this with respect to hospital bills. I don’t know how big a percentage, but my guess is it is more than negligible.
When you talk about technology adoption rates, pharmaceutical utilization, increased demand for services, etc. you are talking about “Aggregate Healthcare Costs”.
Technology and pharma do a few things to influence the aggregate cost:
1) Substitute for labor. You can do with a CT in an hour with one tech what you used to do with exploratory surgery and a whole team. In a sense, the technology has lowered the unit cost associated with diagnosing a bellyache. But related to this…
2) Drive up demand for services by lowering cost-to-patient in terms of risk, pain, and time off work. I’m a lot more likely to want a definitive Dx when it doesn’t involve surgery. So whereas in the past I wouldn’t pay at all for a surgery, now I will pay $1K for a CT.
3) Pharma makes it possible to get relief for any number of conditions we used to simply suffer with. Pharma accounts for 15% of the aggregate spend.
I think you are both right: the Baumol effect influences unit costs, and unit costs are of course included in aggregate costs, but aggregate cost is being driven primarily by increased demand due to increased efficacy and demographic effects.
t
Here you go – save some money and tell grandma to have a nice walk….
http://www.breitbart.com/news/2006/03/24/D8GHV8KO5.html