Unless you are an economist, you probably did not note the death of William Baumol in May. Although a man of varied intellectual interests, Baumol is most famous for his analysis of a simple question: Why do some sectors of our economy, like health care, public education and car repair, become more costly than other sectors, like agriculture and manufacturing?
One would think that Baumol’s answer would be a major theme in today’s health care discussion, but his explanation, like many in economics, does not package well for political campaigns. It’s far simpler, and requires less air time, to blame the opposing party, malpractice lawsuits and human greed.
Baumol’s explanation revolves around one of the more important, but less appreciated, concepts in economics — productivity. Productivity is the ability to create the same product or service with less resources. It is the driving factor behind economic growth. Increasing productivity signals healthy and sustainable economic expansion, upward wage mobility, and increased goods and services at lower or stable costs. It is probably the most important characteristic of a vibrant economy, and the first indicator economists use to assess economic health.
The health care industry has very low productivity. Put another way, a doctor or nurse today cannot service very many more people than doctors and nurses could in 1997. The same is true in economic sectors like education, car repair and community policing. In fact, in both health care and education, the public demands less productivity. Most people want more doctors per patient and teachers per student, not less.
To see how this plays out, imagine a simple economy with only three sectors: manufacturing, agriculture and health care. In this imaginary economy, there is enough wage and population growth to increase demand for goods and services and inflate prices at a rate of 9 percent a year. The farmers, however, are using improved seeds and fertilizers, faster and more efficient machinery, and state of the art transportation and packaging to produce 6 percent more product, at the same cost. The manufacturers are using robotics, distance management and more energy efficient machinery to produce 6 percent more product, also at the same cost.
Even though the real inflation rate is 9 percent across the economy, in agriculture and manufacturing it is closer to 3 percent. The farmer and manufacturer can market their product with little increase in price, even in the face of 9 percent inflation because of this increase in productivity.
Now think about health care where there is very little increase in productivity. Perhaps hospitals found a way to better deal with record keeping, and maybe the emergence of more generic drugs lowered prescription costs, but overall, this sector’s productivity increase was closer to 1 percent. This means that health care will bear the full onslaught of inflationary pressure. Doctors and nurses will insist that their wages rise to accommodate the economy’s inflation, even though, unlike farmers and manufacturers, they did not increase their productivity. A simple visit to the doctor will cost more because of the increasing cost of products and services the doctor and hospital require to function. Prices in this sector are going to go up fast.
We cannot expect the Affordable Care Act, or its Republican alternatives, to solve the fundamental problem of increasing health care costs. None of them specifically deal with the issue of low productivity. What we can expect a national health care plan to do is formalize what most Americans have come to believe — that everyone ought to receive a basic level of health care regardless of their ability to pay, and that everyone will contribute, through taxes or premiums, to the cost of that policy.
The idea that forcing health care back into a free market will reduce costs not only ignores economic reality but would place health care in an ailing market. Competitive markets only work when producers can exclude those who don’t pay for their products. Hospitals and emergency centers cannot exclude sick and injured patients from their services. The cost of their treatment will be borne by the those who purchase medical insurance instead of the taxpayers.
If we can get a workable plan that provides or requires coverage for the majority of Americans, we can then start to think about how to increase the productivity of health care. There is a number of ways to go about this, and more will evolve as medical technology advances, but we need to first build a national health care policy that is not under constant bombardment and sniper fire from every politician seeking re-election.
Though a conservative myself, I don’t see any reasonable alternative but to fix the Affordable Care Act and use it as a platform to deal with lowering the cost of health care.
Alan Haley writes about Maine life from his home in Skowhegan. He can be contacted at email@example.com.