Baumol’s cost disease and physician shortages: an analysis of rising healthcare expenditures from the supply side.
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Wu, Qian, 1994-
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Over the last two decades, the U.S. experienced a stagnant supply of physicians, as well as rapidly rising healthcare expenditures. Based on a novel version of Baumol’s unbalanced growth model, this paper addresses the relationship between physician supply and healthcare expenditures. Applying a fixed-effect estimation on a panel data set consisting of 50 U.S. states over 2008-2016, we confirm the existence of Baumol’s cost disease in the healthcare sector. Besides, a negative correlation between the growth of relative physician supply and unit healthcare cost is found, which according to the theory model, implies a less-than-one substitution elasticity between physicians and non-physicians. Followingly, a translog production function is estimated using seemingly unrelated regression, obtaining a magnitude of the elasticity of substitution which is roughly 0.23. Our study shows that due to the weak substitution between two groups of healthcare workers, the physician shortage can harm healthcare productivity substantially, which further cause the healthcare price to rise dramatically.