The American health care system seems ill. Prices for medical services have continued to outpace inflation during recent history. What is the Healthcare Economist’s diagnosis? Simple, its a case of Baumol’s cost disease.
Baumol’s cost disease is a phenomenon which appears in industries which have slow productivity growth over time (see “What ails us” in The New Yorker). Fine arts performances, education, and health care all fall into this category. For instance, it takes about the same amount of time for a doctor to examine a patient as it did 100 years ago. As productivity in other industries (such as manufacturing, technology, etc.) marches upwards, the relative price of health care services increases. Jane Galt’s blog has a succinct review of the problem (“What’s happening on health care?“)
So, are increased health care prices going to destroy the American way of life? I do not think so. A precondition for Baumol’s cost disease is that productivity in other sectors is increasing. With increased productivity, wages should increase and allow consumers to be able to afford more health care. I do, however, expect health care services to take up a larger share of the average consumer’s income as the relative price of all other goods continues to fall over time.