Book Review

‘<b>The Cost Disease</b> <b>’</b> by William J. Baumol

William J. Baumol.
William J. Baumol.Handout

Health care costs keep climbing. In the last 30 years, the US consumer price index rose about 4 percent per year. During this time, the cost of physician services increased at an annual rate of 5 percent and the cost of hospital services a whopping 8 percent per annum. Americans now spend two and a half times more per capita on health care than the average of other wealthy nations. Projecting these rates into the future, economists predict that 62 percent of our gross domestic product will be devoted to health care in 2105 (up from 7 percent in 1970 and about 18 percent in 2011).

“The Cost Disease: Why Computers Get Cheaper and Health Care Doesn't” by William Baumol.
“The Cost Disease: Why Computers Get Cheaper and Health Care Doesn't” by William Baumol.

Virtually without exception, Democrats and Republicans agree that this spiral is unsustainable. According to William Baumol, however, the conventional wisdom is wrong. A professor of economics and the academic director of the Berkley Center for Entrepreneurship and Innovation at New York University, Baumol argues in “The Cost Disease’’ that it is inevitable that cost increases in labor-intensive industries will outpace inflation but that they will be offset by productivity gains in manufacturing and agriculture, which ensure “a cornucopia of desirable services and abundant products” in the future. The principal threat to health care, Baumol claims, is the illusion that we cannot afford it without making devastating cuts in other vitally important areas.

The “Cost Disease’’ is provocative — it also leans heavily on assumptions and engages in a bit of bait-and-switch. Insisting that firms cannot endure without substantial investment in research and development, Baumol shrugs off the Great Recession with an assertion that there is “little reason to worry” that overall productivity growth will slow in the near future.


Conceding that health care costs are increasing far more rapidly in the United States than elsewhere, Baumol acknowledges as well that if they are not contained “with carefully considered adaptations” then other services vital to a good quality of life (including schools, libraries, performing arts, and police and fire protection) will have to be curtailed.


And so, when all is said and done, Baumol insists, along with just about everybody else, that there is no excuse for failing to act to cut health care costs in the United States. He rounds up the usual suspects (disease prevention through lifestyle changes, halting unnecessary or even marginally beneficial tests and treatments, and reform of medical liability and medical insurance systems) before concentrating on saving time and labor in the activities of health care personnel. If each patient had a bar-coded ID bracelet and nurses administered medications only after scanning it, Baumol indicates, errors could well be reduced by 50 percent, with a savings of about $93 billion (not including a reduction in malpractice insurance premiums).

Perhaps because it has a relatively modest impact on costs, Baumol does not address the still highly controversial Affordable Care Act of 2010, which among other provisions, bans preexisting condition exclusions, allows parents to cover their children up to the age of 26, makes insurance more portable for those who change jobs, extends eligibility under Medicaid, and (to prevent free-riding) requires all Americans to maintain minimum standards of coverage. Baumol does not calculate the financial impact (including reductions in administrative costs) of universal coverage or a single-payer system. Nor does he estimate the savings associated with regional purchasing cooperatives, which leverage the power of numbers to negotiate lower prices from insurance providers and pharmaceutical companies.


The debate on these options rages on, all too often via slogans and sound bites. Even if productivity continues to produce prosperity, it seems clear that Americans must make tough decisions and Baumol’s book offers limited assistance.

Glenn C. Altschuler is the Thomas and Dorothy Litwin professor of American studies at Cornell University. He can be reached at gca1@cornell.edu.