Peter Drucker on Medical Costs

As the presidential race heats up, we'll be hearing more and more about universal medical coverage with less and less informed commentary. I thought I'd share a tidbit from the management guru of all management gurus, Peter Drucker. Here's a passage from his Managing for the Future.

The most telling example are hospitals. When I first began to work with them - in the late 1940s - they were entirely labor-intensive, with little capital investment except in bricks, mortar and beds. A good many perfectly respectable hospitals then had not yet invested in available and fairly old technologies; they had neither X-ray departments nor clinical laboratory nor physical therapy. Today's hospitals are the most capital-intensive facilities around, with enormous sums invested in ultra sound, body scanners, nuclear magnetic imagers, blood and tissue analyzers, clean rooms and a dozen more new technologies. Each of these brought with it the need for additional and expensive people without reducing by a single person the hospital's existing staff. In fact, the world-wide escalation of health-care costs is the result, in large measure, of the hospital's having become an economic monstrosity. Being both highly labor-intensive and highly capital-intensive, it is, by any economist's definition, simply not viable economically. But the hospital has at least significantly increased its performance capacity. In other areas of knowledge or service work there are only higher costs, more investment and more people.

That is to say, investing in an X-ray machine does not reduce costs, it increases them since it requires greater knowledge and hence, higher salaries, on the part of the staff to use it properly. In the upcoming presidential debates, what we will not here from the candidates will be any understanding of the economic realities of the costs of medical care as outlined here. I'd be surprised if you could come up with a counterexample.