Any explanation of the form “administrative bloat” or “inefficiency” has to explain why non-bloated alternatives don’t pop up or become popular. I’m sure the CEO of Ford would love to just stop doing his job and approve every single funding request that passes his desk and pay for it by jacking up the price of cars, but at some point if he did that too much we’d all just buy Toyotas instead. Although there are some barriers to competition in the hospital market, there are fewer such barriers in the college, private school, and ambulatory clinic market. Why hasn’t competition discouraged administrative bloat here the same way it does in other industries?
1. At any given time, you will have sectors where demand is growing faster than productivity (think of health care and education) and other sectors where productivity is growing faster than demand (think of manufacturing). In the sectors where demand is growing faster than productivity, you have rising relative prices, or “cost disease.”
2. In health care and education, you also have a lot of government intervention, and government intervention almost always takes the form of subsidizing demand while restricting supply. Of course, that is going to cause relative prices to be higher, thereby exacerbating “cost disease.”
3. I would argue that there are plenty of barriers to competition in the college market. Accreditation is one such barrier. But there are natural incumbent advantages as well. You may be able to enter the market for high school graduates who are in no way prepared for college. But trying to enter the market at the level of a top 100 college is nearly impossible.
4. There are plenty of barriers in health care, also. Clinics are a good innovation, but the real expenses in health care are in chronic illnesses, and clinics do not compete to treat diabetes, Alzheimer’s, and so on.
5. It is in the nature of organizations for middle managers to try to build empires, adding to cost without necessarily creating value. In for-profit businesses, the owners have an incentive to check this, because the owners want to maximize profits. In non-profits, the natural checks operate only when revenues are not rising to cover the cost of expansion. Non-profits only worry about the bottom line when it threatens to go negative.
In short, some “cost disease” is natural. At any given time, some industries will have demand growing faster than productivity. However, much of it is artificial, as government subsidizes demand and restricts supply. Finally, some of it results from the fact that non-profits are less efficient than for-profit firms.