Health Care Suffers from Declining Labor Productivity

Today’s Managing Health Care Costs Indicator is -0.6%

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Many of us wonder, rhetorically, why the smartphone I wear on my belt costs a fraction of my first (1986) Macintosh computer, yet has so much greater capacity, while improvements in health care seem to always come with very high price increases. 

Yesterday’s New England Journal  answers the question. Labor productivity in most industries has increased dramatically over the last 20 years. The glaring exception is health care, where labor represents over half of all costs, but we produce less health care “product” with this increasingly expensive labor.  While labor productivity in manufacturing went up by 4.7% annually, labor productivity in health care declined by 0.6%.  While incomes were in general stagnant during the Great Recession, health care incomes continued to climb.

The authors say:
Improving the labor structure in health care can be achieved in three ways: reducing the number of workers, lowering wages, or increasing productivity. The first option is a crude approach generally reserved for recessions, though employment in the health care sector continued to increase during the most recent recession. Wages can be lowered by either reducing current wages or replacing current workers with lower-cost (less skilled or more narrowly skilled) workers who can produce the same output. The field of law has gone through such a transition, with the number of jobs for paralegals and legal assistants growing 2.5 times as quickly as that for attorneys in the 2000s

They also point out that we need payment reform to encourage more effective use of resources (another vote against fee for service), and we need regulatory reform to eliminate rules that currently force us to use higher skilled professionals to perform functions that could be “downshifted” to those with less training who have lower incomes. Both reforms could substantially increase the attractiveness of disruptive innovation in health care.  

Increased jobs in health care look good to policymakers struggling with our current unemployment rate.   They look exceptionally good to local officials, who gain the benefit of good jobs funded largely from outside the community.  However, increased employment in health care without substantial increases in the social value of health care output lead to the situation we’re in now, with unsustainable health care inflation coupled with outcomes that are far from the best in the world. 

Our current approach to health care labor shows we are willing to pay an iPhone price for a clamshell phone that barely sends text messages.

Reprise of an image from a summer post:

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