Health System Productivity

November 22, 2009


Productivity is the ratio of outputs to inputs, and productivity growth is the growth of the ratio-that is, it is a shift in a production function. In concept, health system productivity differs little from productivity in any other industry or sector. Though the economics of medical care may in some respects appear unique, production in the sector is still described by a production function, a relation between medical care inputs and output. Productivity change in medical care is a shift in that medical care production function.

However, productivity in the medical care sector has behaved very differently from other industries, even other services industries: Measured productivity growth in medical care has typically been negative. Murray [1] reported negative labor productivity growth in Swedish hospitals. Triplett and Bosworth [2], [3] found negative productivity growth in U.S. medical care between 1987 and 2005, at a rate of about one percent per year, a finding confirmed by Harper, et al. [4]. When the U.K. statistical office added the output of medical care to the country’s national accounts, the negative productivity growth implied by the new measure provoked an outcry in Parliament and the appointment of a special commission on public sector services productivity measurement [5] to determine what was wrong.

Few industries have experienced more innovation, so medical care’s negative productivity growth is highly suspect. Economists generally believe that measured productivity growth in the sector is biased downward because of difficulties in measuring medical care output accurately and also that measurement errors are pervasive in some of the inputs, particularly in pharmaceuticals and medical devices and in the high-tech portions of medical equipment. In all productivity measurement, the most essential tasks are getting the data right, which provides the agenda for section III of this chapter. Data on inputs and outputs-indeed, economic data generally-for the health care sector are much less well developed than for many other sectors of the economy, which is bizarre considering the size of health care in most industrialized countries and the importance of the sector. Many studies of medical care productivity employ data from the national accounts [6], but microdata studies face the same measurement problems.

Medical care is not the only determinant of health. In section IV, I discuss some of the economic implications of the fact that medical care, though it is demanded to improve health, does not, by itself, produce health.

[1] Murray, Richard. 1992. “Measuring Public Sector Output: The Swedish Report.” In Output Measurement in the Service Sector, Zvi Griliches, ed. National Bureau of Economic Research Studies in Income and Wealth Vol. 56, pp. 517-42. Chicago: University of Chicago Press.
[2] Triplett, Jack E. and Barry P. Bosworth. 2004. Productivity in the U.S. Services Sector: New Sources of Economic Growth. Brookings Institution Press.
[3] Triplett, Jack E. and Barry P. Bosworth. 2007. The Early 21st Century U.S. Productivity Expansion is Still in Services. International Productivity Monitor. Number 14, Spring 2007, pp. 3-19.
[4] Harper, Michael J., Bhavani Khandrika, Randal Kinoshita, and Steven Rosenthal. 2008. Multifactor Productivity Contributions of U.S. Non-Manufacturing Industry Groups: 1987-2005. Paper presented at the World Congress on National Accounts and Economic Performance Measures for Nations, Arlington, Virginia, USA, May 13-18.
[5] Atkinson, Tony. 2005. Atkinson Review: Final Report: Measurement of Government Output and Productivity for the National Accounts. Palgrave McMillan.
[6] Commission of the European Communities—Eurostat, International Monetary Fund, Organisation for Economic Cooperation and Development, United Nations and World Bank. 1993. System of National Accounts, 1993.