A Simple Analysis of Healthcare Productivity

Last week the National Center for Health Statistics announced that U.S.  life expectancy had fallen slightly in 2008 to 77.8 years, versus 77.9 years in 2007.  Clearly this decline was related to the recession, in some way. Nevertheless, it struck me as odd that in the same year life expectancy declined,   employment in the private healthcare sector rose by 2.7%,  faster than the 10-year average growth rate.   

That observation made me think (again) about putting together a simple analysis of  healthcare productivity.  I understand quite well that this is a quixotic venture, since productivity is defined as output per worker and no one can agree on how to measure the output of the healthcare sector is.  But I’m going to take it step by step, for transparency. Everyone is welcome to lob tomatoes, as desired. 

 Let’s start from the beginning.  We don’t have a good measure of the output of the healthcare sector. However, population size is clearly related in some way to healthcare output (for a given level of ‘health’, we’d expect the output of the healthcare sector to rise with the population, holding demographic and income composition constant).

So here’s our first step. The chart below compares the 10-year employment growth in private health care services with overall population growth, and with growth of the 65-and-over population.

 

If productivity in the healthcare sector was rising, and the “health output” per American, however defined, was constant, then we would expect healthcare employment to rise slower than the  population.

But in fact, you can see that healthcare employment increased much more than the overall population from 1998 to 2008. (26% vs 10%). FYI, the same was true during the recession–from 2007 to 2010, healthcare employment rose by about 6%, while the population rose by slightly less than 3%).

More important, the increase in healthcare employment also far outstripped the increase in older Americans (a 12% gain). That means the big growth in healthcare employment cannot be due to the aging of the population.

So in fact, we’ve already learned something. The rapid increase in healthcare workers per capita is by itself a key reason for rising healthcare costs–separate from the cost of new drugs, the capital expense for new technology, and the aging of the population. 

(continued below the fold)

During the recession, having healthcare as a steady source of employment growth has been a godsend. However, this is not sustainable over the long run. Suppose that the employment pattern of the past ten years is maintained in the future, so that the annual growth rate of healthcare employment exceeds the growth rate of older Americans by 1 percentage point.  The following chart shows private sector healthcare employment as a share of the working age laborforce (age 25-64).

If things keep going the way they’ve been, healthcare will employ almost 30% of the working-age labor force by 2050. That’s not possible.

To put it a different way:  Over the long run, we’re screwed unless we  reduce the growth rate of healthcare employment down close to the growth rate of the older population.  We just won’t have enough workers to care for all the old folks.

Labor is the real long-term issue around Medicare, Medicaid and other medical entitlements.  Not share of GDP. Not the cost of medical  technology or the price of drugs.   You can bring down payments to drug and medical device companies and doctors all you want, but unless you dramatically increase the growth rate of ‘output per worker’ in healthcare, we will still end up in trouble. This is why ‘cost controls’ have failed to stem the rise of healthcare costs.

Final implication: History suggests that investment in physical capital, technology, and R&D  is the best way to increase the growth rate of “output per worker” in an industry. And in fact, capital stock per worker in healthcare has lagged the rest of the economy….but that’s a different post.

Comments

  1. Total state health care spending tracks fairly well with percentage employed in the health field at the state level. Was surprised that California ranks so low on both.

    http://www.statehealthfacts.org/comparemaptable.jsp?ind=872&cat=8

    http://www.statehealthfacts.org/comparemaptable.jsp?ind=263&cat=5

    The AHA (comp wont let me link) shows the numbers of nurses growing fairly rapidly. A number of newer procedures are very labor intensive, especially with higher priced non physician labor. Things like robotic surgery and EPS procedures. Perhaps they will mature and require fewer people. What I cannot find is how the number of workers not directly related to patient care is changing. That would include administrators.

    ” You can bring down payments to drug and medical device companies and doctors all you want, but unless you dramatically increase the growth rate of ‘output per worker’ in healthcare, we will still end up in trouble.”

    What I see in practice is the hiring of staff so physicians can do more procedures in the same amount of time.

    Steve

  2. You are not really talking about healthcare productivity, but healthcare size normalized for population. What you would need to look at is normalized by patient population (however that could be defined), or possibly nominal volume of healthcare service units provided. And why are you looking only at the 65+ segment? People tend to be in need of increased healthcare attention at earlier ages (50/55+?). That’s where the boomers currently are.

    Another possibly related phenomenon is the constant definition of new “conditions” allegedly in need of medic(in)al treatment that weren’t such classified earlier, in good part for the purpose of pushing additional pills and services for profit, which would presumably show up in additional health”care” service delivery. For example the heavily advertised social anxiety, ADD, ADHD, ED, and now the latest edition “Low T” and others. What struck me about those is how they were advertised in waves, and as soon as apparently the market was saturated it was on to the next “treatable condition”.

    I don’t want to downplay the experience of people suffering from various unpleasant symptoms, but there is a very strong whiff of those being merely coping issues with a dysfunctional society impacting individuals’ mental and eventually physical makeup, and the promise of restoring the perfect life you deserve, for a price.

    • Mike Mandel says:

      Patient population is endogenous, so it doesn’t make sense to normalize on that. Since everyone consumes healthcare services, it made sense to use the entire population as the target.

      I could have done 55 and over, and it would have given very similar results.

      • You’ve disregarded the most important comment from ‘cm’ – that over time additional medical procedures are being added to the pool of total required medical services.

        Therefore, even if healthcare workers were becoming more productive and able to service the growing numbers of old folks – additional workers would be still be necessary to perform these new medical procedures that were not available in the past.

        Mandel, I completely agree with your overall assertion that the healthcare industry needs to be more productive. I only argue there’s additional factors at work besides the population growth factor.

  3. mike shupp says:

    I thought the idea was, we’d be buying robots from the Japanese designed to tend the elderly by now. At least, 20 years ago tht was the idea. Whatever happpened to that notion?

  4. Corby Garner says:

    What is the data source for healthcare services employment that you used?

    • Mike Mandel says:

      Bureau of Labor Statistics. Just the straight private healthcare services job figure. I tried working it with FTEs but it gave the same answer.

  5. Hi!

    – Verkürzte Planungsverbesserung von Produktionsanlagen
    – Verbesserung der Prozess- und Produktqualität durch Ausnutzung der vorhandenen Ressourcen
    – Optimierung der Produktionsanlagen
    – Optimierung der Produktionsauslastung
    – ständige Untersuchung von Verbesserungsmaßnahmen

Trackbacks

  1. [...] This post was mentioned on Twitter by iPundit and Alan Brown, Robert Went. Robert Went said: A Simple Analysis of U.S. Healthcare Productivity – Mike Mandel – http://j.mp/gf4iDs [...]

  2. [...] has been a godsend during The Great Recession but is emphatic about the sector’s need to invest in human capital and boost productivity. Labor is the real long-term issue around Medicare, Medicaid and other medical entitlements. Not [...]

  3. [...] or negative productivity productivity in healthcare (see David Cutler on this and my post here).  The innovation slowdown was also reflected in the slow job growth in innovative industries, [...]

  4. [...] or negative productivity productivity in healthcare (see David Cutler on this and my post here).  This is a chart I ran in January 2010 (the 2007 death rate has been revised up a bit since [...]

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