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Inertia supports Baumol's disease

Posted Oct 10 2012 11:08pm
Steven Perlstein recently wrote a column for the Washington Post reminding us of a theory expounded by economists William Baumol and William Bowen, which has become known as "Baumol's Disease."  The idea, in short, is that there are some activities in society (like auto manufacturing and food production) that are subject to productivity improvements, and there are others (like education and doctoring) that are not as amenable to productivity improvements.  Everything else being equal, then, the percentage of a nation's spending that is devoted to the former will decline over time, while the percentage devoted to the latter will increase over time.

Baumol's theory was not the basis for my column a few days ago , in which I suggested that health care spending is likely to continue to rise in the developed nations.  I did suggest to a friend, though, that Baumol's idea might support the same type of conclusion.  He responded persuasively (to me at least)
Ahh, my theory is a little different, and I very much disagree that, "It’s hard, if not impossible, for them [education and health care] to be produced more efficiently". My theory is that costs escalate in higher ed and health care because the traffic will bear it--what would you not do for the health and education of your family? Providers have taken advantage of that to escalate costs and transfer wealth, and organized their value chains to maximize that transfer. It's very clear in higher ed: The colleges that you and I attended are far different, far costlier, and offer no better an education than 40 years ago. And while lifespan is longer, we are using greater and greater inputs of resources to eke out very small gains in outcomes, with huge variability and enormous non-value-added time, materials, personnel, etc. So no, I'm not buying the notion that "it will always take 23 minutes to play a sonata."

I agree with my friend because I have seen what happens when hospitals focus on providing a higher quality product.  If you do it well--improving quality and safety by reorganizing work in a thoughtful manner, relying on the thoughts and guidance of the front-line staff--there is a virtuous cycle with efficiency.  Waste is driven out of the system. Recall that my conclusion included this paragraph
In all jurisdictions, the ability to deliver better value care will ultimately depend on the redesign of work in hospitals to improve quality and increase efficiency, whether by Lean principles or otherwise.  Unfortunately, this kind of approach will only be adopted by a small percentage of institutions.  It takes vision and leadership commitment, which are generally lacking in the industry.

So, Baumol is right, but he is wrong.  He is right that, as long as productivity gains do not occur in health care, its share of the national budget will grow.  He's wrong  if he thinks that the lack of productivity gains is immutable.  It is not immutable, but it is subject to a terrible degree of inertia.
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