The health-care thing - understanding the economic factors that have increased health care since 1960 - Column

National Review, Feb 21, 1994 by Ed Rubenstein

FOR MORE than three decades health-care spending has grown faster than national income, rising from 5 per cent of GDP in 1960 to 14 per cent in 1993. Some of this reflects the introduction of Medicaid and Medicare in the mid 1960s. But economist William Baumol points out that all countries, no matter what their system of health care, have experienced rising medical costs over this period. Furthermore, the trend in health-care costs is no different from that of other services:

The CPI, which measures economy-wide inflation, rose about 4.9 per cent per year between 1960 and 1993. The price of medical services rose at 6.9 per cent per year. The difference means that, in dollars of constant purchasing power, the cost of visiting a doctor rose nearly 85 per cent over this period--although that is a narrower margin than in the case of per-pupil education costs.

Mr. Baumol, who has taught economics at Princeton and NYU and is a past president of the American Economic Association, dismisses the conventional explanations of rising medical costs. If the lack of competition were the problem, for example, then health care would be growing more monopolistic. It isn't. There are more HMOs, covering more people, than ever. The share of applicants admitted to medical school has been growing, along with the proportion of students that graduate.

The litigation explosion? Mr. Baumol doubts that this can explain much, given that the number of medical court cases has been declining, and the percentage of cases in which the plaintiff wins an award has fallen off sharply. Similarly, if doctors' incomes were the culprit, then those incomes should be rising. But U.S. Government data show that the real income of physicians has fallen slightly, slipping even relative to schoolteachers' pay.

The "problem" is that health care, like most other services, is by its very nature a handicraft activity that resists standardization. Two sick people (or two damaged cars) will each have somewhat different problems that must be treated individually rather than on an assembly-line basis. (It is worth noting that while auto-repair costs have grown faster than the CPI, the cost of new cars has not.) Technology cannot reduce the time doctors spend examining their patients.

Meanwhile, manufactured goods and agricultural products require less and less labor to produce. They get cheaper and cheaper relative to health care, education, auto repairs, and other services. Hence, manufacturing's share of GDP is increasingly crowded out by services. But in terms of real consumption, the balance between goods and services has held about steady, according to Mr. Baumol.

If he is right, we devote an ever larger share of our income to medical care because we can afford to do so without sacrificing other consumption items. Paradoxically, the same forces that push health-care costs up will make it possible to supply the public with ever better health care in the future, just as they did in the past.

If President Clinton's health-care plan stymies productivity growth, however, a real crisis could soon develop.

  PRICE TRENDS: HEALTH CARE AND
      OTHER SERVICES V. THE CPI

           (1960 = 100.0)

                 Medical                     Auto
         CPI     Care       Education(*)    Repair
1960    100.0    100.0       100.0           100.0
1970    131.1    152.5       213.4           138.1
1980    278.4    335.9       530.0           307.5
1990    441.5    730.0     1,182.6           490.9
1991    460.1    793.7     1,255.0           513.2
1992    474.0    852.5     1,317.4           533.2
1993    488.2    903.1     1,360.4           550.6

(*) Per-pupil education spending.