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The Cost Disease: Why Computers get Cheaper and Health Care Doesn’t

W. J. Baumol pp. 272 New Haven: Yale University Press 2012 ISBN: 978-0300179286

We are constantly informed that our ageing societies and spiraling health care costs, eating up ever increasing percentages of GDP, will end in disaster unless we trim the costs of healthcare.

Not true, according to Princeton Economics Professor Emeritus William J. Baumol and his contributing authors.

This book is a short easy read, but of vital importance to all doctors, who have a duty to advocate sensible economic decisions in the face of considerable economic illiteracy on the part of politicians, many journalists and most lay people.

Baumol described his ‘cost disease’ in the 1960’s in the performing arts – arguing that it is difficult to achieve significant labour productivity increases when it takes as many musicians just as long to perform a Mozart symphony today as when it was composed.

Nearly fifty years of data have borne out the predictions he made in the 60's, and the same argument applies to all ‘stagnant’ sectors of the economy, such as healthcare and education, because of the large component of human input.

It doesn’t particularly matter that a modern hip replacement – or any given medical intervention - is better and longer lasting than an earlier one (ie: the quality-adjusted cost has fallen) the quality-unadjusted bill is the same.

Meanwhile ‘progressive’ sectors, mostly computing and manufacturing, make impressive productivity gains, with two effects:

1.      Stagnant sector prices must rise more rapidly than the Consumer Price Index;

2.      Because of the large increase in the overall wealth of society generated by the excellent work of the progressive sectors, we can still, and will always be able to afford, the healthcare (and arts) we want.

If we invest in education to continue the productivity and wealth gains.

That’s a big ‘if’ – and this is where informed doctor-advocates are needed.

This is the main thesis of the book, which is written for the general reader. Doctors may argue that Baumol overlooks some factors which drive up cost, for example the role of third party payers (the patient wants the very best, because the insurer will pay), but he also debunks some myths by means of studying actual data – for example the cost of malpractice lawsuits.

Many of the examples are from the US, but are applicable internationally, and Baumol makes a cogent argument for broad and deep medical insurance markets in poor societies where it is even more important to pool risk.

Given that the First Law of Healthcare Economics states that healthcare spending in any society will rise as its GDP rises, and that there is no satiety in healthcare (No society has ever said, ‘No more, thank you, that’s enough healthcare…’) the fear of society collapsing under the healthcare bill will not disappear. Baumol argues that if governments cannot be led to understand his ideas, their citizens may be denied vital health, education and other benefits because they appear to be unaffordable, when, in fact, they are not.

His answer to ‘Can’t afford healthcare?’ is ‘Invest in education.…’

Jason Brockwell

Click here to view this book on the publisher's website