Megan McArdle muses over why healthcare and education are so expensive:
So how do we explain health care and college cost inflation? Well, health care economist David Cutler once offered me the following observation: In health care, as in education, the output is very important, and impossible to measure accurately. Two 65-year-olds check into two hospitals with pneumonia; one lives, one dies. Was the difference in the medical care, or their constitutions, or the bacteria that infected them? There is a correct answer to that question, but it’s unlikely we’ll ever know what it was.
Similarly, two students go to different colleges; one flunks out, while the other gets a Rhodes Scholarship. Is one school better, or is one student? You can’t even answer these questions by aggregating data; better schools may attract better students. Even when you control for income and parental education, you’re left with what researchers call “omitted variable bias” — a better school may attract more motivated and education-oriented parents to enroll their kids there.
So on the one hand, we have two inelastic goods with a high perceived need; and on the other hand, you have no way to measure quality of output. The result is that we keep increasing the inputs: the expensive professors and doctors and research and facilities.
While that’s probably a better explanation than Ezra Klein’s, which boils down to that both are necessities, or “Baumol’s cost disease”, I think that any good explanation for why healthcare and education are so expensive needs to explain why both are much more expensive here on a per capita basis than anywhere else in the world.
One thing that Megan might add to her model is that both healthcare and education are provided artisanally, despite a paucity of evidence that is the most effective approach, and the artisans have been left in charge of determining what should be provided and how it should be provided. There’s also a widespread delusion in the United States, no doubt a triumph of marketing, that all sorts of goods but particularly healthcare and education, are luxury goods and must necessarily be better the more you pay for them.
Costs will never be controlled as long that’s the case, particularly as long as those costs are not borne directly by the consumers. That’s the acorn in the prescriptions of the privatizers.