Beware shoveling money at overpriced service industries

Will we embrace "Cost Disease Socialism" instead of material abundance?

The other day I got a CT scan at UCSF, to check for possible aneurysms (don’t worry, I don’t have one). My insurance and I were charged a total of over $20,000 for this service. This is over 4 times the maximum price that most sources will list for a brain CT. Out of pocket, a CT scan can cost as little as a few hundred dollars.

Our politicians — both Democratic and Republican — are working on ways to curb surprise medical bills. That will be a good thing, but the problem runs much deeper. Ultimately, it’s about costs. The money my insurance company and I paid for my ridiculously overpriced CT scan subsidizes excess costs elsewhere in the health care system.

The U.S. is an outlier in terms of health care costs. Our system delivers similar outcomes to other countries’ systems, but we pay much more for those results — about 17% of our national GDP, compared to about 9%-12% for other rich countries. And the situation is getting worse, as health care prices outpace incomes. By now you’ve probably seen the famous cost graph from the American Enterprise Institute:

Prices for health care, education, and child care have strongly outpaced wages. Things don’t look much better when you compare these prices to median personal income:

Attempts to explain this via Baumol’s cost disease — the tendency of service-sector wages to rise as economies get richer — fall short, because the price of health care has gone up so much faster than wages (even when you compare just to college-educated wages). And attempts to explain health care prices as an income effect are also not credible, for many technical reasons (most glaringly, because A) they assume their conclusion by treating the U.S. as representative rather than as an outlier, and B) they rely on highly nonlinear single-sector models that predict that as countries get richer, they spend so much more on health, or whatever other overpriced thing is being modeled, that eventually all their other consumption goes to 0).

In other words, America is suffering from a unique sort of cost disease, and no one has yet come up with a credible or convincing simple explanation. And it isn’t just the big-ticket service industries — in addition to health care and education, the problem afflicts the construction industry, where productivity has stagnated or declined over time. These excess costs are crippling the country in a variety of ways — preventing us from building new housing, hurting transportation, raising the cost of labor in a variety of industries without actually delivering higher standards of living to workers, and so on.

We don’t yet know why this is happening (and I plan to write lots more about it), but at least people are starting to realize that it’s a problem. That’s good. In the meantime, though, there’s enormous pressure to relieve these costs by having the government pick up the slack and pay for more of people’s health care, education, and child care.

“Cost Disease Socialism” as a palliative