"Baumol's disease" provides an interesting explanation for why service businesses like health care can only be so efficient. Can they be more efficient than they currently are? Absolutely, but any improvements made will not bring delivery costs down to the levels found on the product side of our economy. From Steven Pearlstein's column in the Washington Post:
No matter how innovative people were in coming up with new technology and new ways of organizing their work, Baumol and Bowen reasoned, it would still take a pianist the same 23 minutes to play a Mozart sonata, a barber 20 minutes to cut the hair of the average customer and a first-grade teacher 12 minutes to read her class “Green Eggs and Ham.” Based on this observation, the duo predicted that the cost of education and health care would inevitably outstrip the price of almost everything else.
Now, 50 years later, Baumol has updated and expanded his observation with a new book,“The Cost Disease,” which sheds some useful light on our current economic debate.
The basic facts are well-known to most Americans: Over the past 30 years, overall prices have risen 110 percent, median income has risen 150 percent, medical costs have risen 250 percent and college tuitions have risen 440 percent.
To hear the politicians talk, you’d think the rise in tuitions and medical costs was an American phenomenon. But as Baumol points out, the growth rates are pretty consistent across all developed countries.
The whole column is an interesting read, and I would be remiss if I didn't point out that Pearlstein's the Robinson Professor of Political and International affairs at my alma mater, George Mason University.