Healthcare spending was approximately 10 percent of our GDP in 1990, and today, it's nearly doubled.
As various sectors in the American economy leverage contemporary technologies, increasing automation and standardization, workers are producing more goods, thereby increasing their own worth, which subsequently increases wages. For many reasons, healthcare is an outlier in this equation. The healthcare industry fails to deliver the same kind of gains to productivity as other sectors, but must keep wage growth inline in order to attract and retain talent. This is the essence of Baumol's Cost Disease: wages and costs continue to increase in service-oriented sectors, yet productivity lags—leading to an ever-increasing percentage of GDP devoted to sectors like healthcare and education.
Those of us familiar with the phrase "the art of medicine" understand the power of human touch in the healthcare industry. The humanity required in the delivery of high quality healthcare inherently means labor costs contribute to a striking proportion of overall spending. In 2010, 56 percent of all healthcare spending was spent on labor, and wages have risen sharply at more than 2 percent for the last few years. In a 2013 paper published by the U.S. Department of Commerce's Bureau of Economic Analysis, multifactor productivity growth in healthcare was cited at 1.6 percent. Simply put, this is Cost Disease at work.
So if healthcare is sick, do we blame innovation? It's true, new drugs, diagnostics, and treatments (that are wildly expensive and marginally improve outcomes) drive cost growth unnecessarily. On the other hand, innovative treatments for previously untreatable illnesses also contribute to cost growth, though no one would argue this is a bad thing. If cost growth was a sickness, innovation in and of itself would be a major underlying driver.
The prescription to cure Baumol's Cost Disease involves creating and implementing technologies to increase overall productivity of the healthcare labor market, so it can keep pace with other industry sectors. Three points below highlight how innovators and entrepreneurs are leading the way:
1. Improve caregiver workflow
Highly trained medical professionals drown in administrative paperwork, and technology can add to the burden. For example, adopting Electronic Health Records (EHRs) can actually drive down productivity in doctors' offices and hospitals. While these dips are likely temporary, we should not be callling it an economic win when the digitization of health data achieves similar performance-productivity with that of paper records. Data-driven technology should increase productivity ten-fold. We in the technology industry can develop tools that deliver results at that level while streamlining administrative burdens.
Companies like Dorsata develop clinical workflow applications that can work with EHRs to present a more efficient experience for data capture, while also delivering clinical best practices. Dorsata, in conjunction with the American College of Obstetricians and Gynecologists, developed a prenatal record specifically designed to help obstetricians speed their workflow and deliver profitable and high-quality prenatal care. Another healthcare innovator, athenahealth, utilizes its network solutions and data from more than 87,000 providers to alleviate the monumental administrative burdens that bury physician offices across the country, and in turn, drive overall performance. These are the kind of workflow improvements that can make human work hours drastically more productive while maintaining the humanity in healthcare.
2. Educate and empower the consumer
Placing an emphasis on education will drive consumer engagement and involvement, while reducing the management burden on healthcare labor, particularly for patients with chronic conditions. Further, consumers can be armed with information and given incentives that will help them make better cost/benefit decisions. As athenahealth CEO Jonathan Bush says, "...we can't expect patients to shop responsibly for their care when they don't have reliable and accessible information about cost and quality of the healthcare services they use."
3. Improve staff and facility utilization
All caregivers must practice at the top of their license. We should do a better job allocating the time of our highly trained physicians while more adequately compensating other roles in the healthcare system. For example, nurses are largely overworked and underpaid, yet play a vital role in driving productivity gains. This will help everyone.
There is too much facility redundancy in our healthcare system today. As a result, we need to advance reimbursement models that encourage more effective use of facilities. This will decrease the capital investments required to keep these facilities maintained and staffed. Therefore, labor can be more efficiently redistributed to understaffed areas of the market.
To cure Baumol's Cost Disease, the public sector must create an environment where investments in innovations that drastically improve labor productivity cannot just survive, but thrive in the healthcare industry.
References:
Baumol, W. J. (1993). Health care, education and the cost disease: A looming crisis for public choice. Public Choice, 77(1), 17-28. doi:10.1007/bf01049216
Macdonnell, M., & Darzi, A. (2013). A Key To Slower Health Spending Growth Worldwide Will Be Unlocking Innovation To Reduce The Labor-Intensity Of Care. Health Affairs, 32(4), 653-660. doi:10.1377/hlthaff.2012.1330
Aizcorbe, A., Medeiros, G., & Strassner, E. (2013). Measuring productivity for the US health sector. Bureau of Economic Analysis, U.S. Department of Commerce.
Cooling wages for U.S. healthcare workers dim inflation outlook. (2016, July 08). Retrieved January 23, 2017, from http://www.reuters.com/article/us-usa-economy-healthcare-idUSKCN0ZO20S
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