This brief provides a new explanation for why healthcare cost growth is showing restraint. Specifically, we find evidence that the healthcare sector is finally managing to use its workers more productively.
In this policy brief we define a new measure of healthcare productivity, Gross Medical Productivity (GMP). We define GMP as the number of potential patients per healthcare worker, where the pool of potential patients is the entire population. GMP measures healthcare productivity by looking at how effectively the sector uses its workers. So, if the potential patient population grows faster than the number of healthcare workers, GMP rises.
We argue GMP is a reasonable proxy for healthcare productivity, and could be a leading indicator for trends in healthcare cost growth going forward. Research shows labor accounts for over half of total healthcare costs1, suggesting a strong relationship between labor productivity and cost growth. Indeed, historically GMP has been falling at a rapid rate, corresponding to rapid growth in healthcare costs. That suggests a rise in GMP, or a rise in the number of potential patients per worker, will place downward pressure on healthcare cost growth. And because we can see changes in GMP well before official healthcare cost data is available, we believe GMP can provide early insight on the direction of cost growth.
From this approach we find evidence to suggest healthcare cost growth continued to show restraint in 2012, especially for the elderly population. We found that GMP rose considerably in 2012 for the 65 and over population, one of the largest drivers of healthcare cost growth, as healthcare workers became more productive in treating older patients. However, we also note that GMP for the entire potential patient population continues to fall.