Les Jones

There are several reasons why health care costs are so high, but I think this is one of the important ones. An inability to improve productivity is just a huge problem.

There is a weird irony here… better treatments don’t always result in fewer sick people - they usually just help sick people live longer. The end result is that a given population needs *more* health care providers to support them over time. Productivity actually declines as treatments improve.

The good news? You are getting good value for your dollar. If you like, I can put you on the “1980 plan”: you pay 1980 prices, but you can only use 1980-era technologies and 1980-era drugs, and your have to go to a doctor who hasn’t learned a thing in 20 years. Interested? Me neither…

Actually, Bob’s Auto Body Shop has seen some productivity improvements. Low power wire feed welders, improved fillers, HPLV paint spraying. These probably just offset the increased cost of the cars being repaired.

[...] most likely reason is Baumol’s Cost Disease, a 2007 word of the day that’s worth repeating. Here’s a simple example from Wikipedia: Baumol’s cost disease [...]

…we have a moral obligation to ensure that every child attend Harvard University…

While it is true that some fields more than others are able to take advantage of advancements in productivity, it is not true that labor-intensive activities must continue at a constant (or lower)level of productivity. The problem is that activities like educational and judicial organizations are resistive to productive changes. If you’re looking for causes, the absence of competition clearly rears its head.

The dominant cause of increasing health care costs is increasing government regulation and mandates, and the associated bureaucracy.

The regulations create skyrocketing costs of compliance (ever visited a cash-only doctor’s office? They don’t have an army of insurance specialists to pay for), and the mandates force misallocation of resources towards politically motivated goals.

Much of this comes via the insurance companies and HMO’s, which makes it a lot easier for the shallower sort of mind to blame them for originating it. But things like HIPAA and COBRA can only come from government. Hell, even HMO’s themselves are a government idea.

Remember, cost-saving innovation occurs in small increments in labor intensive businesses. The motivation to improve total factor productivity is highest when small changes in margins are meaningful, and rewarding to those making investment decisions.

Auto repair is still lebor intensive, but the average repair shop is, by and large, far more capital and technology-intensive today then it was 50 years ago. Even before computers lived under our hoods, Snap-On Tools became a huge company by designing tools which provided small incremental productivity improvements.

Small changes matter when price competition exists, and where consumers write the checks.

Anytime government helps you to pay for something, it’s cost goes up. Note health care, housing and education. All inflate faster than lettuce.
If what you produce is in demand, you can hold its price up by limiting the quantity. Watch DeBeers, watch Columbia’s prosecution of Arthur Miller for maximizing the production of education by distributing excellent lectures via video.

Restructure ALL Government aid to pay only for increasing the supply, NEVER to help competing buyers (be they potential home buyers, potential students, potential health care recipients) outbid each other. If we subsidize both bidders for anything where only one is available, we do no one a service and do everyone the disservice of running the price up.
Provide NO government assistance that is not functionally dependent on the increase of supply.

“[T]he same number of musicians are needed to play a Beethoven string quartet today as were needed in the 1800″ - but today that performance can be recorded, uploaded to the internet, and downloaded onto the MP3 players by millions of people for listening the time and place of their choosing (rather than by a few hundred in an uncomfortable baroque concert hall). Isn’t that an improvement in efficiency?

Sonar touched on this, but I think the original conclusions of Baumol and Bowen are deeply flawed.

Total Productivity is not just a measure of the labor required to produce something, it must also consider the costs of distribution.

Consider Classical Music. In Beethoven’s time, a string quartet’s performance could only be enjoyed by those in the audience. In 1960, that performance could be recorded on vinyl and distributed via record companies around the world. Today, it can be digitally recorded and put on youtube and reach a much larger world population without the need of a record company.

Now consider Education. In the Renaissance, lecturers had a limited supply of scholarly work to expose their students to, and those students had to be physically in the presence of the professor. In 1960, a professor had 3 centuries of scholarly work before him, allowing him to give his students a much more valuable product at the same cost. And today, that lecturer could videotape his lectures for broadcast on PBS, or better yet post them on youtube, and reach a staggering audience.

In both cases, the “total” productivity has vastly improved over time. The conclusions drawn about health care are now in serious doubt.

I don’t have all the answers, but it seems to me it might be worth considering:
* Allowing doctors to offer diagnosis advice without fear of becoming the latest powerball numbers;
* Allowing patients to choose who they want to care for them, instead of having the gov’t give legitimacy to a “guild” whose primary effect is to limit supply;
* Ending the insanity of “insuring” against a $200 expense.

I see Shawn hit directly upon my point while I was typing.

Shawn, I think you’ve got a point about recording, but if you actually want a string quartet to perform at your wedding then Baumol is still correct. It’s admittedly his weakest example.

Matt, there are productivity gains in labor, but they’re not the dramatic improvements that are turning $2000 plasma TVs into $800 plasma TVs or expensive 286 CPUs into cheaper and faster multi-core Pentiums.

I work in the Canadian health care bureaucracy. A major cause of cost inflation is the under-supply of health providers. A number of years ago the government limited the intake at medical school. Surprise, we now have too few doctors, and the ones that remain can command top dollar.

An answer to cost inflation in health care is to make more doctors. If we start making many more doctors and nurses, and allow doctors and nurses from other countries to practice in our country more easily, then supply goes up and price goes down.

Les, one thing I was thinking but forgot to mention was that string quartets are not the most efficient way to produce the music, they’re basically a vanity way of doing so. It’s like a homebuilder who chooses to use old-school log-cabin fronteir tech to build his home. The reality is that a kid with an internet connection can compose and perform a piece of music and distribute it to a staggering number of people at virtually no cost.

The artificial costs imposed by demanding a string quartet perform the score on-site are similar to the artifical costs imposed by the government requiring that only licensed physicians can treat patients, and only if they see the patient face-to-face.

Les, again, using computers as an example, and understanding the concept that the string quartet is a vanity method of producing the music (you can produce the music much more cheaply and nearly as high quality with some electric signals and a good set of speakers), then the same *IS* true of TVs, because it *WOULD* still require the same labor costs (possibly quite a bit more) to produce an accurate replica of an old 286 today, using the methods that were used at the time.

In fact, music production *HAS* experienced the same kinds of gains as the fields you mention…

Productivity in health care delivery has and will continue to improve in productivity. For example, many diseases that once required expensive surgery or simply rendered the patient disabled are now treated at a fraction of the cost by drugs. Yes, some of these drugs are expensive, but compared to previous treatments, or the loss of the patient’s productivity, there is a significant net benefit.

Actual care delivery has also improved in productivity. Nurses spend little of their time applying bandages. Mostly they coordinate care among physicians, therapy techs and diagnosticians. Tools like information systems, wireless phones and new more productive care delivery methods have improved productivity considerably over the past 20 years.

Having been in health care for almost 25 years, I can tell you that the only reason care delivery productivity has improved is because the government has slowly ratcheted down reimbursement for Medicare and Medicaid — forcing health care providers to reduce costs in order to stay in business.

All I know about higher education I learned when I went to college more than 30 years ago. But even with no improvement in teacher productivity, costs should grow along with inflation. It seems that costs are escalating due to competition for “star” academics (does this result in a higher quality product?), and money spent on either subsidizing or attracting research that is secondary to universities primary mission of educating under graduates — but high on the list for bragging rights.

Matt, again, the string quartet is the weakest of the examples, almost to the point of being a metaphor, but you’re comparing music reproduction with performance, which isn’t the same thing. If you scroll up and check the Wikipedia entry, the original study was underwritten by a performing arts commission. Healthcare and education are better examples, but for historical reasons the string quartet example always comes up.

Tim, I largely agree with you that there have been productivity gains in health care. The problem is that when you compare those gains with the gains in mass-manufacturing products, then the gains don’t look as good. That’s the larger point of Baumol’s cost disease.

When you say “Nurses spend little of their time applying bandages” I have to wonder how the bandages get applied. If there’s a wound it has to be bandaged, and it takes about the same amount of labor to do that as it did a hundred years ago.

Of course, the wound is much less likely to get infected now because of antibiotics and sterile gauze, so it’s less likely to need debriding or long-term care, and that is a productivity gain.

Les, you’re dancing around my point. I addressed Health Care and Education, but you ignore that with a judo sidestep that acknowledges the weakness of the music analogy and then move along as if you’ve somehow debunked my entire argument. Or am I missing something?

The quoted section above says “… it takes nurses the same amount of time to change a bandage, or college professors the same amount of time to mark an essay, in 2006 as it did in 1966.”

But that’s not really accurate. In fact, there are liquid bandages (http://en.wikipedia.org/wiki/Liquid_bandage) which can be sprayed on, and Scantron (http://en.wikipedia.org/wiki/Scantron) can grade student papers much faster than any human possibly could.

The main argument I’m making is that arbitrary restrictions on the methods of production are what cause the costs to increase and innovation to stagnate. Naturally, public sector systems are going to experience this more since they’re almost completely defined by regulations that stipulate how those services must be delivered.

Matt, everyone gets your “point”, it’s just not germane. You’re like a kid waving his hands around his sister’s face, and when she complains and the parent tells him to stop, he says “but, I didn’t touch her.” It’s annoying.

Otherwise, mostly good points. Especially Ed from Canada:

“An answer to cost inflation in health care is to make more doctors. If we start making many more doctors and nurses, and allow doctors and nurses from other countries to practice in our country more easily, then supply goes up and price goes down.”

Who’da thunk it? Now, if only we could get Ed’s words into the thick skulls of those who think they can conjure up expanded and improved medical care King Canute style.

Bart, I’m (not) sorry I somehow offended you.

I was trying to engage our host in a reasoned debate. It’s something I enjoy. Unfortunately, far too often, people simply make assertions without backing them up. Now, that’s annoying.

I tried to stay on topic and civilly respond to Les. I guess I fail at blog-comments…

Productivity in one field of health care - Lasik eye surgery - has improved. It has become affordable to almost anyone and quality is better. Similarly for cosmetic surgery. Ditto for veterinary medicine. What’s different about these areas? Government and insurance have no involvement; there is a mostly free market. The customer pays directly to the provider without a middleman.

Matt, except that you challenged the part about the fact that it takes “college professors the same amount of time to mark an essay, in 2006 as it did in 1966″ by referring to scantrons, which grade multiple choice tests, rather than essays. Which invalidates all of your argument.

And while spray-on bandages exist, I seriously doubt they’re the norm in most hospitals. They seem to be a quick and dirty field expedient.

Your point about TVs and 286s was similarly muffed. “it *WOULD* still require the same labor costs (possibly quite a bit more) to produce an accurate replica of an old 286 today, using the methods that were used at the time.” That’s pointless, because the entire point is that there are newer methods of producing microprocessors. That’s exactly why the economies have changed.

Les, you’re right that I moved the goalposts on the college professor point, but I don’t think that one error invalidates my entire argument.

The link about spray-on bandages says “In addition to their use in replacing conventional bandages in minor cuts and scrapes, they have found use in surgical and veterinary offices, as they cause less trauma, and do not have to be removed like sutures (stitches) and staples do.” That doesn’t sound to me like a “quick and dirty field expedient”.

I’m not trying to be difficult. I completely agree with your conclusion that it suggests limits on government intervention. However, I think that my example of trying to produce a 286 today using the technology of the early 90’s is exactly on point.

The theory of “cost disease” suggests that the lack of newer methods of production is inherent in the systems. I am suggesting it’s a result of external action (namely, regulations). Personally, I have no doubt that it is possible to create software that would reasonably diagram an essay and determine if it followed certain clearly defined rules. And I believe that this would have a dramatic positive effect on the ability of the general population to communicate effectively (God knows, I could use the help). But education has been dominated by government direction for hundreds of years, such that there is no market for these kinds of innovations.

So, again, just as in my example, it is a conscious choice to continue using old methods of production that causes the relative costs to rise. It doesn’t matter whether it’s choosing to use a string quartet instead of using a mechanical contraption that can be programmed to play each instrument; or choosing to apply gauze bandages instead of using modern liquid bandages; or choosing to have a human being read and grade an essay instead of allowing the market to spur the creation of software that can do the job just as well. In all those cases, it’s the conscious choice to use obsolete methods of production (or unintended but foreseeable result of government regulation to suppress innovation) that drives up cost.