This series’ first post introduced William J Baumol’s theory of economic cost disease, manifest in personal service professions’ and industries’ reliance on fixed-time, face-to-face encounters to deliver and perfect the goods. Generally stated,
Baumol’s conundrum is that service wages must rise on the back of stalled productivity while manufacturing labor costs rise naturally on the back of increasing productivity. The result is increasingly expensive (some would say inefficient) services to administer increasingly efficient devices.
The disease metaphor assumes a chronic but non-fatal condition for which Baumol offered up several treatment options which fall under the metaphorical rubric of “managing expectations.” This post and the next do a brief overview of his suggested options as they may apply to hearing healthcare.
Plan A: Just Give it Time
Baumol’s preferred treatment is the least invasive but also the hardest medicine to swallow. He recommended educating stakeholders–ourselves included–to a basic economic idea that is logical but far from intuitive:
The chronic pain of continuously rising price is natural, reasonable, defensible, affordable and diminishes over time.
Most readers will argue that, so let’s approach it Baumol-style by using a back pain metaphor. With age comes chronic back pain for many. The natural desire is to lean in to pharmaceutical and surgical management to stop the pain fast and forever. Yet, acute approaches are no more likely to improve outcomes than non-invasive, low-risk patient involvement programs (e.g., graded exercise, group support). In other words, given time and understanding, the problem quits being perceived as a threat and becomes a manageable part of life that consumes some of our resources but doesn’t kill us.
Baumol applied this time-weighted treatment approach to the chronic economic disease of perpetually rising cost of personal services in the market. He reasoned that group economic education worked better than shocking (e.g. regulating) a healthy market:
The perceived problem is not a real problem. If quality of availability2 [of hearing healthcare] stems from misunderstanding of what the public can really afford, then surely it is important to try to educate the public about this misapprehension. (from Baumol, pp 61-65).
In our case, the economic education wisdom for patients and audiologists goes like this (quotes below from Baumol’s book):
- Not a Problem: the market is well behaved over time, thanks to productivity-driven rising wages, or expected rises, as the result of technological innovation3 and hearing aid prices that are tracking or slightly lagging inflation.
- You’re Getting Richer: A 2%/year productivity increase for 100 years means you’ll be “8 times richer than you are now with a vast array of new ways to spend your wealth.”
- You Can Afford It: “.. rising purchasing power brought about from increased productivity overall means that the public as a whole continues to be able to afford rising-cost services without sacrifice.”
- It Beats the Alternative: Real problems can arise due to unintended consequences of cost controls and other regulatory efforts to control a perceived problem.
Which Isn’t to Say That Logic Works
Baumol’s economic solution is a hard sell, as audiologists know. Our own persuasive efforts to convince that hearing aids are the treatment of choice for those with hearing loss often idiomatically “fall on deaf ears.” Many people with social/activity limitations due to hearing loss still have have no inclination to be educated out of their misapprehension that a pill will “fix” it.
Besides lagging wages with productivity since the Great Recession–which has put at least a temporary hole in the economic logic–the bigger problem is what’s called perceived value of money. It’s no surprise that consumers’ make consumption decisions by considering money’s face value more than its purchasing power; otherwise we wouldn’t forever be bemoaning the cost of things now compared to yesteryear. It’s not logical, but it’s the way we all think. Yes, we’re wealthier but yes there are more ways to spend our wealth and no, we don’t want to spend nominally more on hearing services than we used to, even though it can be done “without sacrifice.” Baumol was aware and cut to the chase (paraphrased from p 62):
- “Politicians and the public have a hard time seeing that bigger numbers aren’t a problem.
- Consumers are likely to feel that they cannot afford the continually increased cost of hearing healthcare and be unwilling to revise household budgets to covering rising costs, even as rising per capita incomes make this financially feasible and reasonable
- You can’t argue with consumer preferences; people are entitled to spend their earnings as they choose.”
Plan B and Beyond
Fair enough. People are never going to like increasing cost of hearing health care no matter how much more they gain from it than in the past and no matter the real value of money. This will stay a chronic problem of perception for which there is no argument.
It’s time to leave theoretical discussion and think on what needs to be done to solve a (non) problem before it becomes a real problem. That’s the topic of the next post.
References:
- Deyo RA et al. Overtreating chronic back pain: Time to back off? J Am Board Fam Med. 2009; 22(1): 62-68
- “Availability” may be price or access, both of which pose costs to consumers because they require resource allocation with budgetary restraints.
- This is the predicted economic expectation over time (see Greenstone et al., 2011), though wages in the post-Great Recession market have not moved in lockstep with productivity in all sectors and have lagged overall.
Holly Hosford-Dunn, PhD, owned and operated a dispensing audiology practice in Tucson and was active in management of HearingHealthMatters.org through 2017. She holds BA degrees in Communication Sciences, Psychology and Economics; MA in Communication Disorders; PhD in Hearing Sciences. Following post-doctoral work at Max Planck Institute (Munich, DE) and Eaton-Peabody Auditory Physiology Lab (Boston), she joined the Stanford medical school faculty as director of audiology. She has authored/edited numerous text books, chapters, journals, and articles and taught Marketing and Practice Management in a variety of academic settings. She continues to consult and write on topics related to hearing health care vis-à-vis consumer demands, professional training, technological advancement, capital investment, industry consolidation, regulatory control, product and service distribution, and strategic pricing.
