What is Driving the Rise in Health Care Expenditures? An Inquiry into the Nature and Causes of the Cost Disease

The last 40 years have seen a rapid increase of government expenditures on public welfare arrangements. Increasing healthcare expenditures form a significant part of these outlays, and its share of total government expenditure has risen rapidly. This paper argues that the determinants of growth in healthcare expenditure are partly to be found in the way healthcare is organised. As economist William Baumol noted already in the 1960s, personalized services can easily fall into a stagnation trap characterized by rapidly increasing cost inflation. Healthcare today shows clear signs of being a “stagnant personal service” with poor productivity levels compared to other services such as telecommunication. As a result, healthcare inflation is far higher than the standard inflation rate, creating high real costs that push up the expenditure for healthcare. Consequently, we argue for reforms in the organisation of healthcare provisions to reduce the sector’s productivity lags in European countries and to reap the benefits that emanates from integration with other markets.