For Ailing Health System, a Diagnosis but No Cure
By DAVID M. HERSZENHORN
WASHINGTON — Nearly everyone agrees that there is something sick about the American health care system, especially when it comes to the seemingly out-of-control rise in costs.
While Democrats and Republicans continue to fight over the remedy, there is one man who can claim to have rendered a specific diagnosis and — more than 40 years later — he wants lawmakers and President Obama to know that there probably is no cure.
What afflicts the American health care system (and those of other industrialized nations) is called Baumol’s cost disease. It is named for William J. Baumol, an economist at New York University, who turns 88 next month. And it explains why health care costs will almost certainly continue to rise faster than general inflation, and why Democrats might not want to set expectations too high when it comes to their health care bill.
“Let me say first of all that I am a strong supporter of the general notion of the president’s health care proposals,” Dr. Baumol said in an interview. But he warned that policy makers, including Mr. Obama, were in danger of promising too much.
“One mustn’t exaggerate what this program can accomplish,” he said, “because if you claim miracles and then prices keep going up two years from now, you have bought yourself some trouble.”
Dr. Baumol and a colleague, William G. Bowen, described the cost disease in a 1966 book on the economics of the performing arts. Their point was that some sectors of the economy are burdened by an inexorable rise in labor costs because they tend not to benefit from increased efficiency. As an example, they used a Mozart string quintet composed in 1787: 223 years later, it still requires five musicians and the same amount of time to play.
Despite all sorts of technological advances, health care, like the performing arts, suffers from the cost disease. So do other public services like education, police work and garbage collection. While some industries enjoy sharp increases in productivity (cars can be built faster than ever, retail inventory can be managed better), endeavors like health care are as labor-intensive as ever.
And yet, wages in health care grow to match wage increases in the broader economy. (Imagine trying to pay today’s violinist the same as a counterpart in 1787.)
All of this happens invisibly, but the proof is in the budget ledgers of local, state and federal governments. Cost disease helps explain why low-income Americans can now afford flat-screen televisions that were out of reach a decade ago, but health insurance that was unaffordable in January 2000 remains unaffordable in January 2010.
At the same time, demand for health care never lets up. So while slow sales of video games or clothing can reduce prices, health care prices never ease. And while the robots that help build cars have replaced human beings on the assembly line, robots that help out in modern operating rooms are not as economically efficient.
“We do now have robots performing surgery, but the robot is under constant supervision of the surgeon during the process,” Dr. Baumol said. “You haven’t saved labor. You have done other good things, but it isn’t a way of cheapening the process.”
Recent research, including a December 2008 study for Centraal Planbureau, the Netherlands Bureau for Economic Policy Analysis, has found that Baumol’s cost disease continues to be a major factor in rising health costs around the world.
Dr. Baumol is no stranger to efforts to overhaul the health system. In 1994, he was briefly tapped to help with the Clinton health care proposal, in part because of his friendship with Senator Daniel Patrick Moynihan, the New York Democrat and chairman of the Finance Committee, who became a major force in dismantling President Bill Clinton’s proposal.
Dr. Baumol described his role in 1994, and his relationship with Mr. Moynihan, in an interview with Alan B. Krueger, who is now the assistant Treasury secretary for economic policy, published in the Journal of Economic Perspectives in 2001.
(Mr. Moynihan, who died in 2003, had found a political epiphany in the theory of cost disease. “You have now explained to me why the Democratic Party is called the party of tax and spend, because we are financing all the things that are affected by the cost disease and Republicans want to short-change them,” Dr. Baumol quoted the senator as saying.)
In 1994, as now, Dr. Baumol urged officials not to overpromise.
“Most of all, I said, Look at what’s happened in Europe and Japan,” he recalled in the 2001 interview. “You have virtually every sort of government control: some on doctor’s fees, some on cost per visit. In none of the countries have they been able to get costs to rise more slowly than the rate of inflation. You are promising something which will come back to haunt you within the lifetime of this administration.”...
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