Why are healthcare costs rising so fast?
This is the underlying question in many topics of conversation, articles in the popular press, election cycles, presidential transition periods, etc. This issue of healthcare spending in the U.S. (or any other country) is incredibly complex. Contributing factors include inefficient and outdated information technology, high administration costs, obesity, healthcare financing (as opposed to cost) issues, higher prices in the U.S. … to name a few.
But there is one driving factor that seems missing from many discussions and debates: the role of labor in the delivery of care.
According to the Kaiser Family Foundation, U.S. healthcare spending is comprised of 21% physician and clinical services, 31% hospital care (of which ~3/4 is labor-intensive), and 8% home health care and nursing home care. Another 29% is “other health spending” and “other personal care”—both of which surely have a labor component. Somewhere between 50% and 75% of our healthcare dollars go to labor.
The healthcare system’s reliance on labor—skilled and expensive labor—is an important factor. Williams Baumol and Bowen would probably note that although there is a tremendous amount of innovation in the healthcare sector, a disproportionately small amount of the innovation actually makes workers more productive. And our healthcare workers are disproportionately expensive—for example, our specialists are paid more than 50% more than specialists in OECD countries as compared to per capital GDP.
Compare healthcare productivity to other industries. The computer and peripheral equipment manufacturing industry increased output per hour by 24% per year over the past 20 years. Certainly there are sectors of healthcare that have improved productivity. Medical and diagnostic laboratories have increased output per hour by 4% since the mid-80s.
But one the whole, the delivery of care requires people.
For all the talk of prescription drug spending driving cost of care in this country, prescription drugs represent at most 10 cents of every dollar. Will increased use of generics and other pharmaceutical cost containment measures drive down cost of care? Sure. To the point of halting growth in U.S. healthcare spending? No. Healthcare spending in the U.S. grew 6% in 2007. Pharmaceutical spending would have had to more than double to be responsible for this growth. The labor-intensive nature of healthcare overwhelms the effect of any single healthcare technology.
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It is likely that current reform legislation will embed prevention and wellness approaches that have proven cost saving results. Increasingly hospitals and employers are looking seriously at such approaches.”