From Strings to Sutures
What String Quartets Tell Us about Healthcare Prices
NOTE: I’m posting excerpts from my not-yet-published book, “Fifty-Million-Dollar Baby: Economics, Ethics, and Health.” The goal is to edit the manuscript in plain view, and to ask for your comments, corrections, suggestions, and criticisms. This essay is an edited version of a 2019 column I wrote for InsideSources.com.
American healthcare prices are high and rising, but a big part of that trend doesn’t have much to do with healthcare. Hence, governments commanding prices to head downward will likely enjoy as much success as Canute had commanding the tides to recede. (And, unlike our betters in DC, Canute knew in advance that the tides weren’t going to listen to him.)
As an economist and musician, I’m delighted that a Beethoven string quartet can help us understand why healthcare costs so much in America. Economist William Baumol used the quartet to explain what has become known as “Baumol’s Cost Disease” or “the Baumol Effect.” In their compact book, “Why Are the Prices So D*mn High?,” Eric Helland and Alex Tabarrok hired Baumol’s quartet to explain the high costs of American medicine (and education).
As Helland and Tabarrok explain, very little changed about the production of a string quartet performance between 1826 and 2010:
In 1826, when Beethoven’s String Quartet No. 14 was first played, it took four people 40 minutes to produce a performance. In 2010, it still took four people 40 minutes to produce a performance. Stated differently, in the nearly 200 years between 1826 and 2010, there was no growth in string quartet labor productivity. In 1826 it took 2.66 labor hours to produce one unit of output, and it took 2.66 labor hours to produce one unit of output in 2010.” (2.66 hours = 40 minutes x 4 players.)
Presumably, other labor inputs, like rehearsal time were also unchanged over those years.
The authors further note that between 1826 and 2010, average hourly wages for production workers in other industries rose from $1.14 to $26.44 in 2010 dollars ($1.33 to $30.79 in 2023 dollars). So, the four 1826 musicians had a choice: perform music for 40 minutes or earn roughly $3.55 (4 x $1.33 x 2/3 of an hour) in some other endeavor. Today, musicians could either perform the quartet or work somewhere else for roughly $82.11. So hiring the quartet in 1826 might have cost something in the neighborhood of $3.55 — since that would have been as remunerative as any other available work. But, no professional quartet in 2010 would give a performance for $3.55. The four could dig ditches for 40 minutes and still earn close to $25. More likely, being skilled individuals, they could earn something around $82.11.
Thus, in real (inflation-adjusted) terms, musicians’ incomes likely increased somewhere in the area of 23-fold over 184 years. And this is not because they or their profession changed, but rather because the remuneration of other professions changed.
But what does all this have to do with healthcare? Well, everyone knows the costs of healthcare have risen dramatically. Public discourse offers lots of popular explanations. Maybe quality of care has improved dramatically. Maybe there are too many administrators and insurance intermediaries. Maybe malpractice-related costs are exploding. Maybe the price rise is related to the increase in technology costs. While there are elements of truth to all these, Helland and Tabarrok explore the data and found these explanations wanting.
What changed, they observed, is the cost of highly skilled professional labor—including labor used outside of healthcare. Healthcare professionals have special attributes. Physicians, nurses, and other providers tend to be top academic performers — smart, hard-working, reliable, consistent. But medicine isn’t the only profession that attracts such individuals. Physicians, thus, demand very high salaries because they’re capable of reinventing themselves as attorneys, accountants, software programmers or business owners—if those other fields pay better than medicine. As much as anything, the authors argue, it’s the salaries in other fields that push physician salaries upward. (They make similar arguments with respect to the costs of K-12 and higher education.)
This thesis has profound implications for healthcare policy. Many proposals— such as Medicare-for-All bills on the left and interstate insurance markets on the right—are premised on forcing healthcare providers’ salaries downward. The Baumol (or Helland/Tabarrok) thesis, however, casts grave doubts on whether such downward pressure on physician compensation is possible (unless we agree to settle for lower-quality doctors). This thesis casts doubts on policy prescriptions that assume that if we re-structure our healthcare system to resemble the system of, say, Canada, Germany or the United Kingdom, then our costs will drop toward their levels. As Helland and Tabarrok note, highly skilled professionals in non-healthcare-related fields earn considerably more in the United States than in these other countries. And that can’t be attributed to “single-payer accounting” or “government-run software coding.”
In 2017, the median general practitioner or family physician in the United States earned nearly $200,000, and in 2016, in Canada, the equivalent figure was under $100,000. The Baumol Effect, as relayed by Helland and Tabarrok, suggests two things. First, Canadian doctors work for $100,000 because Canada offers those highly skilled professionals relatively little opportunity to earn much more in other fields. Second, if you tell American physicians they must earn only $100,000, many or most will find something else to do in life.
The most promising ways to bring down healthcare costs involve fundamentally changing the ways that healthcare is produced. But that approach does not accord well with the quick-and-easy promises that fit into sound bites.
Robert F. Graboyes is president of RFG Counterpoint, LLC in Alexandria, Virginia. An economist, journalist, and musician, he holds five degrees, including a PhD in economics from Columbia University. An award-winning professor, in 2014, he received the Reason Foundation’s Bastiat Prize for Journalism. His music compositions are at YouTube.com/@RFGraboyes/videos
