Is Productivity Improvement in Health Care Higher Than Commonly Assumed? 

The conventional view of U.S. health care is that it is needlessly expensive. Total spending and life expectancy comparisons with other high-income countries , which show the U.S. underperforming its peers, are cited to confirm this perspective. An implicit assumption is that rising annual costs in the U.S. go mainly toward supporting existing standards rather than better health outcomes. While this perspective is widely held, it also might be excessively pessimistic. The health sector is not, and has not been, stagnant. It continues to innovate and deliver more effective services each year, which is why the Commerce Department’s Bureau of Economic Analysis has long wanted to construct improved measures of system performance. Two recently-published papers from the department further strengthen the case for revisiting the relationship between cost and health outcome trends. While the U.S. has higher per capita costs than other countries, it is also on the outer edge in terms of its openness to innovation and technological improvements, which means it might be better positioned to take advantage of productivity-enhancing breakthroughs. New therapies and intervention techniques are constantly being introduced that help patients live longer and with more functional capacity. It follows that at least a portion of higher annual spending goes toward improvements in the health status of patients that would not have occurred with last year’s clinical protocols. The question is whether these improvements in the ratio of health care value to total dollars spent are minor, and therefore too small to make a difference, or substantial and therefore relevant to discussions about future reforms. Another way to look at the same question is to ask whether price rises that are observed for the full bundle of services needed to treat certain conditions can be “quality adjusted” to isolate productivity increases over time. If one were to control for the quality component, measured by looking at changes in longevity and functional capacity, perhaps observed price rises would be less steep or even vanish entirely. That is the lens through which the authors of the two BEA papers examined the relevant data. The first study , written by Calvin Ackley and Abe Dunn of the BEA and John A. Romley of the University of Southern California, combined the cost of caring for Medicare fee-for-service patients for nine common conditions, including hip fractures, heart disease, and pneumonia, with measures of the health status results from the interventions. Through a series of complex calculations, the authors estimate annual productivity improvement for treating these conditions over the period 2002 to 2021 at 7.5 percent, which is high. They note that other studies show less favorable productivity trends for other common conditions. A second study , by Eli Liebman of the University of Georgia and the three authors of the first paper, presents a methodology for estimating productivity improvements across the entire health sector using population-wide health outcome data to supplement measures of aggregate costs. Their conclusion is that productivity in U.S. health care has been going up at a rate of about 1.0 percent annually, although some important assumptions, such as the dollar value assigned to improved health outcomes, can shift this estimate substantially in either direction. Examples of the causes of productivity gains include new therapies for high-volume conditions like HIV and Hepatitis C which have added costs when introduced but have also produced substantial and measurable health outcome improvements for the affected patients. Another common pathway comes from the expiration of patents for high-volume therapies, such as those for heart disease, which might lead to broader take-up of less costly generic substitutes and then also better population health outcomes. There are qualifications to be considered of course. First, there are many potential sources of population-wide health status improvements, including better nutrition and environmental conditions, which are not directly attributable to medical services and products. Disentangling the causes of longer lives and better functional capacity is a challenging statistical exercise. Second, other countries with tighter regulations also have experienced substantial improvements in longevity and functional capacity, which means the U.S. might have seen these same improvements even with less openness to innovation. However, it is also possible that some breakthroughs get introduced first in the U.S. and then are picked up in other countries when strong evidence emerges of their added value. Third, improvements in caring for some conditions do not imply the U.S. has eliminated wasteful spending systemwide. There is ample evidence that needlessly high pricing of some services continues because of various market distortions. Further, in some cases, patients are getting services that offer very little prospect of improving their health. For these and other reasons, it is likely that the ceiling on annual productivity improvement in U.S. health care remains high. Past innovations are helping, but there are many unexploited opportunities for further efficiency-improving changes. The post Is Productivity Improvement in Health Care Higher Than Commonly Assumed? appeared first on American Enterprise Institute - AEI .