Facing Up to the Costs of Healthcare (Book Review)

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William J. Baumol et al., The Cost Disease: Why Computers Get Cheaper But Health Care Doesn’t, New Haven, Yale University Press, 20120300179286

Book Review by Jim Murphy

This is an important book. Because of its technical nature, it may be a stretch to say that everyone “must” read it, but any health care worker or consumer (which of course means everyone) would benefit from understanding what it says. The economics of healthcare may be abstruse but we are all affected by it.

Whether as health care workers or as citizens, we are constantly subjected to laments over “skyrocketing health care costs”. There are many ambiguities in what is meant by “cost”. Sometimes the reference is to the cost of health insurance, which is indeed increasing faster than inflation or than wages. Other times, the meaning is that total expenditures on healthcare are rising in comparison to all other spending, and the latest projections do indicate that its share will continue to grow, accounting for about one fifth of the gross domestic product by 2023.

Moreover, the causes for these escalating costs are quite complex. Just scanning the news will elicit of a long list of “usual suspects”: greedy doctors, Obamacare, our fee for service system, fraudulent practices, people wanting too much, malpractice lawsuits, aging population, and so on. Whatever influence some of these factors may actually have, Baumol shows that they are not fundamental.

Healthcare is basically a service industry, like education, the arts and government – what Baumol calls the “stagnant” sector of the economy. These are labor-intensive: overall, it takes just as much time and just as many workers to perform a play or to do an operation as it ever did. By contrast, in the progressive sector, i.e., manufacturing and technology, innovation reduces labor costs as it takes fewer people and hours to make a computer or a car. Wages in the stagnant sector do not rise as fast as those in the progressive one, but they do increase if only because otherwise too many workers would leave service jobs for manufacturing ones. As it is, employment in the service industries has since industrialization grown relative to that in industry, just as agricultural employment has shrunk.

It is the great merit of Baumol’s book that it shows that the fact that healthcare costs are rising, absolutely and relatively, does not mean that anything it is wrong – it is simply in the nature of things. That doesn’t mean that efforts to reduce such costs should not be pursued (efficiency and elimination of waste are desirable goals) but they should not be obsessive.

Moreover, Baumol, following up by a comment made by economist Joan Robinson, points out that the “cost disease” does not mean that we can’t afford the healthcare we need and deserve or that healthcare rationing is a necessary consequence of rising medical costs. Rather, the gains from lowered costs in the productive sector can be used to offset the higher costs in healthcare, education and the arts. Of course, as the author notes, that is a political question and there has been little to no awareness of the “cost disease” in that arena.

Needless to say, there are more nuances than a blog post can deal with. But whether one accepts Baumol’s analysis totally, in part, or not at all, the notion that all can’t have good healthcare is wrong and dangerous. Moreover, attempts to cut costs – such as shorter hospital stays, privatization of government services, or increased classroom size – can do more harm than good. Medically, socially and politically there needs to be more understanding of the issues raised in this book, as well as a more intelligent discourse on their implications.


jim murphyJim Murphy has a solo consulting practice called Management 3000, focusing on organizational development and change management. Being semi-retired, Jim is willing to provide very reasonably priced consulting, coaching or  project work for organizations aspiring to improvement in organizational culture, effectiveness and employee engagement.

Formerly he led the Massachusetts Bay Organizational Development Learning Group, was Human Resources Director for the City of Boston Assessing Department, and served as a consultant with the Boston Management Consortium.  His consulting practice includes management coaching as well as research and writing on employee relationships, leadership, healthcare and collaborative practices.  Having produced newsletters for several organizations  and being a frequent content writer for the”Confident Voices in Healthcare” blog, he is interested in writing and research opportunities, as we all consulting and coaching.

www.manage2001.com   jim@manage2001.com


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