The Cost Disease This page intentionally left blank The Cost Disease Why Computers Get Cheaper and Health Care Doesn’t William J. Baumol with contributions by David de Ferranti Monte Malach Ariel Pablos- Méndez Hilary Tabish Lilian Gomory Wu New Haven & London Published with assistance from the foundation established in memory of Philip Hamilton McMillan of the Class of 1894, Yale College. Permission to reprint is hereby gratefully acknowledged for previously published extracts of this text. Figures 4.3 and 4.4 appeared in BAUMOL/ BLINDER, Economics, 12e, © 2011 South-W estern, a part of Cengage Learning, Inc., reproduced by permission, www .cengage. com/p ermissions . Copyright © 2012 by William J. Baumol. All rights reserved. This book may not be reproduced, in w hole or in part, including illustra- tions, in any form (beyond that copying permitted by Sections 107 and 108 of the U.S. Copyright Law and except by reviewers for the public press), without written permission from the publishers. Yale University Press books may be purchased in quantity for educational, business, or promotional use. For information, please e-mail [email protected] (U.S. offi ce) or [email protected] (U.K. offi ce). Set in 10.5/14.5 Janson type by Westchester Book Serv ices. Printed in the United States of America. ISBN: 978-0-300-17928-6 (cloth) Library of Congress Control Number: 2012938269 A cata logue record for this book is available from the British Library. This paper meets the requirements of ANSI/NISO Z39.48– 1992 (Permanence of Paper). 10 9 8 7 6 5 4 3 2 1 In memory of Pat Moynihan, who took the cost disease analysis and ran with it. This page intentionally left blank Contents Ac know ledgm ents xi Introduction xvii Part 1 The Survivable Cost Disease One Why Health- Care Costs Keep Rising 3 Two What Causes the Cost Disease, and Will It Persist? 16 Three The Future Has Arrived 33 Four Yes, We Can Afford It 43 vii Contents Five Dark Sides of the Disease: Terrorism and Environmental Destruction 69 Six Common Misunderstandings of the Cost Disease: Cost versus Quality and Financial versus “Physical” Output Meas ures 77 Seven The Cost Disease and Global Health 94 Part 2 Technical Aspects of the Cost Disease Eight Hybrid Industries and the Cost Disease 111 Nine Productivity Growth, Employment Allocation, and the Special Case of Business Ser vices 116 Part 3 Opportunities for Cutting Health-C are Costs Ten Business Serv ices in Health Care 141 Eleven Yes, We Can Cut Health- Care Costs Even If We Cannot Reduce Their Growth Rate 154 viii Contents Twelve Conclusions: Where Are We Headed and What Should We Do? 180 Notes 183 References 207 About the Authors 237 Index 239 ix