Baumol's Law: Will Health Care Costs Always Exceed Inflation?

David Herszenhorn has an interesting article in today's New York Times suggesting that it's not possible to get health care cost inflation below the general rate of inflation.  He interviews and quotes economist William Baumol, who wrote an article in 1966 pointing out that while many tasks got less expensive over time, others required similar labor input - and thus the cost did not decrease.

Baumol's academic studies were around performing arts.  A Mozart quintet took 5 musicians in the 1700s, and still takes 5 musicians today.  A flat screen TV is manufactured with far fewer inputs today than it was a few years ago -hence the cost comes way down.

Although Herszenhorn doesn't mention it, this relates directly to the CMS Actuary's contention that it requires flawed logic to assume we can lower Medicare fee increases to account for future 'productivity increases.'

I acknowledge that it's more difficult to reengineer health care delivery than to optimize a manufacturing process. It's not easy to get doctors to rethink their approach, and demands of patients facing loss of life or health are different than demands of consumers in Best Buy.   However, unlike the string quintet, there are elements of health care where input costs can be dramatically decreased.  Efforts at implementing Toyota production techniques at hospitals have dramatically decreased the number of steps required.  Most of us who have visited a physician office recently in the US and seen how many staff are required to do administrative (nonclinical) tasks know that there are substantial productivity gains possible in health.

Further, countries with robust growth tend to have large increases in health care costs, while countries undergoing economic contractions (think Russia after the fall of the Soviet Union, or Argentina after the currency failure) tend to have health care costs that go down.   Countries like Russia with declining health care costs, though, also often have far worse outcomes.  This would suggest that overall, health care costs are sensitive to the overall economy - lowering health care costs (or health care inflation) is difficult in good economic times, and easier in tough times.

I don't think Baumol's Law unequivocally tells us we can't manage health care costs.  It does provide insight into why it's so difficult.