The Cost Disease

The Cost Disease: Why Computers Get Cheaper and Health Care Doesn't

William J. Baumol
with contributions by David de Ferranti
Monte Malach
Ariel Pablos-Méndez
Hilary Tabish
Lilian Gomory Wu
Copyright Date: 2012
Published by: Yale University Press
Pages: 288
https://www.jstor.org/stable/j.ctt32bhj9
  • Cite this Item
  • Book Info
    The Cost Disease
    Book Description:

    The exploding cost of health care in the United States is a source of widespread alarm. Similarly, the upward spiral of college tuition fees is cause for serious concern. In this concise and illuminating book, well-known economist William J. Baumol explores the causes of these seemingly intractable problems and offers a surprisingly simple explanation. Baumol identifies the "cost disease" as a major source of rapidly rising costs in service sectors of the economy. Once we understand that disease, he explains, effective responses become apparent.Baumol presents his analysis with characteristic clarity, tracing the fast-rising prices of health care and education in the U.S. and other major industrial nations, then examining the underlying causes of the phenomenon, which have to do with the nature of providing labor-intensive services. The news is good, Baumol reassures, because the nature of the disease is such that society will be able to afford the rising costs.

    eISBN: 978-0-300-18848-6
    Subjects: Business, Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-x)
  3. Acknowledgments
    (pp. xi-xvi)
  4. Introduction
    (pp. xvii-xxii)

    Many years ago, I received a handwritten note from the extraordinarily creative economist Joan Robinson, commenting on the “cost disease” that is at the center of this book. The cost disease asserts that the costs of health care, education, the live performing arts, and a number of other economic activities known as the “personal services” are condemned to rise at a rate significantly greater than the economy’s rate of inflation, as indeed they have throughout the period for which data are available.¹ This is so because the quantity of labor required to produce these services is difficult to reduce.

    Since...

  5. PART 1 The Survivable Cost Disease
    • ONE Why Health-Care Costs Keep Rising
      (pp. 3-15)

      In 1980, it cost $3,500 per year, on average, to attend a four-year undergraduate school in the United States (including room and board). By 2008, that figure was ancient history: a single year of undergraduate study cost nearly $20,500.¹ That’s an average annual increase of more than 6 percent—well above the rate of inflation. If this trend continues, by 2035 annual tuition at a top-tier private school could cost nearly $200,000.²

      College tuition is not an isolated case. Medical care and live theatrical performance are also victims of a widespread pattern of increasing costs that has come to be...

    • TWO What Causes the Cost Disease, and Will It Persist?
      (pp. 16-32)

      Why are the costs of health care, education, and other services rising so persistently at rates faster than the economy’s rate of inflation? This chapter seeks to explain what drives that phenomenon.

      Obviously, such an explanation is of considerable interest in itself, but there are many other reasons why it merits our attention. First, the explanation enables us to infer whether rising costs are likely to be transitory or can be expected to persist. I will argue that, while there are no guarantees, assuming no catastrophic developments undermine our economic system, these rising costs can be expected to endure for...

    • THREE The Future Has Arrived
      (pp. 33-42)

      The rising real (inflation-adjusted) costs that constitute the cost disease are both persistent and dramatic, but they cannot force us to give up our customary patterns of consumption. Instead, the flip side of the cost disease—the near universality of rising productivity in the economy as a whole—means that wecanafford health care, education, and other personal services despite their disturbingly persistent rates of cost increase. Indeed, we can even afford steady expansion in the amounts of these services we consume.

      This does not mean, however, that society is unaffected by the cost disease. Over the years, general...

    • FOUR Yes, We Can Afford It
      (pp. 43-68)

      We saw in Chapter 3 that the cost disease has brought profound changes in the way we live. If it continues to influence the workings of the economy, the consequences may be even more far-reaching. With continued growth in general productivity, the typical household may enjoy an abundance of goods, but if governmental responses are poorly considered, citizens also may suffer from great deterioration in public services such as garbage removal. The services of doctors, teachers, and police officers may become more automated and impersonal, and the arts and crafts may be increasingly supplied only by amateurs—the cost of...

    • FIVE Dark Sides of the Disease: Terrorism and Environmental Destruction
      (pp. 69-76)

      While I have argued that the rising-cost side of the cost disease is not as worrisome as it may appear, I have also hinted repeatedly that other consequences of the disease are more threatening. These dangers stem, paradoxically, from some of the products whose costs are drivendownwardby the cost disease. In this chapter I will focus on two prime examples of this: military armaments and threats to the environment.

      Warfare is surely the activity that punishes the second-best combatant the most. Driven by this threat, nations spend generously on preparation for self-defense or aggression, including an unending search...

    • SIX Common Misunderstandings of the Cost Disease: Cost versus Quality and Financial versus “Physical” Output Measures
      (pp. 77-93)

      The explosive growth of college tuition and the rising cost of hospital services—two very visible symptoms of the cost disease—have generated many fallacies and misunderstandings. Some have blamed rising costs on greedy college presidents, doctors, and hospital administrators, who are suspected of paying themselves more generously. True, there may be some hospital administrators and college presidents who have grown profligate or self-serving, but it is hardly plausible that all or even most of them are changing in this manner. This alone could hardly make overall costsriseat the pace we observe. It is simply not plausible to...

    • SEVEN The Cost Disease and Global Health
      (pp. 94-108)
      Ariel Pablos-Méndez, Hilary Tabish and David de Ferranti

      The rapidly rising cost of health care in the United States is hardly atypical. The cost disease is universal, so it applies to health care throughout the world. Although some economists and policy makers recognize the fundamental role that economic forces play in health-related cost increases, the worldwide rising trend in health spending is too often attributed to the aging of populations and the high cost of novel technologies.

      In discussing the cost disease to this point, we have largely relied on evidence drawn from the world’s wealthier economies. In this chapter, we turn to the rest of the world,...

  6. PART 2 Technical Aspects of the Cost Disease
    • EIGHT Hybrid Industries and the Cost Disease
      (pp. 111-115)

      The cost disease affects research and development (R&D) much as it does education, medicine, the performing arts, and other technologically stagnant personal services. Even though researchers employ computers and other equipment whose real costs tend to decline markedly and therefore decidedly belong to the progressive sector, the disease nevertheless can lead to a persistent rise in the real cost of research. Like other services whose productivity is not easily increased, the portion of research that consists of sheer thinking does not benefit from the labor-saving offset to rising wages that characterizes economic sectors whose productivity is constantly increasing.

      Many industries...

    • NINE Productivity Growth, Employment Allocation, and the Special Case of Business Services
      (pp. 116-138)
      Lilian Gomory Wu and William J. Baumol

      Any index of the overall consumer price level is an average of the prices of all of the goods in the economy. It follows then that if the real (inflation-adjusted) prices of all commodities are not increasing at the same pace, some are rising at above-average rates—meaning that their real prices are increasing—while the real prices of others must be falling.¹ Thus, as we have seen, there are two sides to the cost disease story: one concerns products whose real prices are condemned to increase (that is, personal services in the stagnant sector), and the other concerns virtually...

  7. PART 3 Opportunities for Cutting Health-Care Costs
    • TEN Business Services in Health Care
      (pp. 141-153)
      Lilian Gomory Wu

      The fact that the level of health-care costs in many other relatively prosperous countries continues to be far lower than that in the United States, though they tread similar upward paths of growth, means that there must be ways for us to obtain savings in our health-care system. This chapter and the next are intended to give substance to this contention by illustrating a number of opportunities for cost reduction.

      This chapter applies business services, like those described in the previous chapter, to the reduction of health-care costs. Hospitals are predominantly nonprofit institutions and cannot be regarded as business firms....

    • ELEVEN Yes, We Can Cut Health-Care Costs Even If We Cannot Reduce Their Growth Rate
      (pp. 154-179)
      Monte Malach and William J. Baumol

      We have noted repeatedly that the cost of health care is not rising only in the United States. Other developed nations¹ as well as many emerging economies are seeing their costs rise at a disturbingly fast, seemingly unstoppable rate. The cost disease ensures that this process will continue inexorably.

      But this does not mean that thelevelof costs cannot be brought down or that we cannot curb wasteful practices and inefficiencies in the way health care is provided. It is important to emphasize the distinction between thecurrent magnitudeof health costs and thespeedwith which those costs...

  8. TWELVE Conclusions: Where Are We Headed and What Should We Do?
    (pp. 180-182)

    The picture that emerges is not so daunting. We can have it all: better health care, good education, and even more orchestral performances. In exchange, we will not have to surrender food, clothing, shelter, or even less essential commodities such as comfortable vacations, unrestricted travel, and readily available entertainment. This is not merely naïve optimism but something we have already experienced. The exploding cost of hospital care and galloping college tuition increases since World War II have not prevented Americans from consuming these and other services and goods. Indeed, we now live longer than ever, and a continually rising share...

  9. Notes
    (pp. 183-206)
  10. References
    (pp. 207-236)
  11. About the Authors
    (pp. 237-238)
  12. Index
    (pp. 239-249)