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The Productivity Growth Slump and The Case of the (Missing) Contact Lens

Productivity growth in the United States continues to slump.  The latest numbers from the BLS show that multifactor productivity growth was only a tiny 0.2% in 2015.

In particular, gross medical productivity of the US healthcare system fell by 1.2% in 2015, according to PPI’s calculations.* That’s after two years of ticking up slightly.

Falling gross medical productivity implies that healthcare employment is increasing faster than the population, even after adjusting for the changing age mix. That’s not fiscally or economically sustainable over the long run, because it means that healthcare is absorbing more and more of the workforce, and leaving less for other productive activities.

Is this negative productivity trend going to continue? The good news is that innovation in pharma, medical devices, and apps has the potential for reducing the amount of excess labor costs in the healthcare system (see, for example, “The Folly of Targeting Big Pharma,” WSJ, December 10, 2015).

The bad news is that some groups of medical providers are looking to retain or even extend inefficient and costly practices by fighting back against new technologies and online delivery systems. For example, the trade group for optometrists recently filed what they called an “expansive” FDA complaint against a vision-texting app. This app would cut costs and save labor by letting people test their vision at home and send the data to a licensed ophthalmologist for a prescription.  Similarly, the optometrists also support a new bill in the Senate that would make it harder and more expensive for consumers to use valid prescriptions to buy their contact lens online, even at a time when more and more shopping is done via the Internet.**

The U.S. needs to embrace productivity growth in the healthcare sector if overall productivity and living standards are to rise for everyone. Hopefully 2015 will turn out to be a blip rather than a trend.

*Gross medical productivity is defined to be the age-adjusted population, divided by the number of workers in the broad healthcare sector, and benchmarked to 2009=100. The population is adjusted for the relative cost of health care at different ages. The broad healthcare sector includes private and public hospitals, ambulatory care facilities, nursing homes, pharma and medical device manufacturers, biotech companies, and health insurers.

Gross medical productivity is an easy-to-calculate measure of how well the health care system is using labor resources to treat the potential patient population. Labor is important because it accounts for a large share of the cost of health care. We use age-adjusted population as the numerator because any of us—no matter how healthy—can become an involuntary consumer of healthcare at any moment.

** PPI first wrote about this issue in 2001, in a policy paper entitled “The Revenge of the Disintermediated: How the Middleman is Fighting E-Commerce and Hurting the Consumer.”

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