The Effect of Baumol’s Cost Disease and Physician Supply on Healthcare Expenditures

In this study, we examine how Baumol's (1967) cost disease and physician supply affect healthcare expenditures. Previous studies have found evidence to support the existence of cost disease in the healthcare sector, but many of these studies assume that labor within the healthcare sector is homogeneous. We divide healthcare workers into generalist physicians, specialist physicians, and nonphysicians to examine how the supply of each of these groups affects healthcare expenditures. Our results indicate that there is a shortage of both generalist and specialist physicians. Additionally, we find evidence that physicians of either type are complements, rather than substitutes, with nonphysicians. This means that increasing the relative supply of nonphysicians to physicians may further exacerbate the inefficient allocation of labor and lead to increased healthcare expenditures.