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Vital Signs Blog

Hospitals may have improved productivity after all

The nation spends more money on healthcare in hospitals than anywhere else for obvious reasons: They treat the sickest patients with the most expensive technology and a highly skilled workforce, around the clock. That makes hospitals a highly attractive target for efforts to increase productivity, yet federal data suggest gains have been elusive. But is that the case?

New research, published online by the journal Health Affairs, found hospitals made productivity gains during the first decade of this century that have gone unrecognized because of the challenge economists face tracking performance in healthcare.

Hospitals made annual productivity gains in treating heart attacks, heart failure and pneumonia between 2002 and 2011 after researchers adjusted for changes during the period to the severity of patients' illness and the quality of medical care. The study, conducted by University of Southern California economists with Medicare data, did not include physician costs when doctors were not employed by the hospital.

The paper could have implications for how Medicare pays hospitals, which includes an adjustment for productivity, said lead author John Romley, a USC economist and public policy professor. Hospitals may be more productive than believed, he said, and therefore better able to operate as Medicare squeezes payments.

The Affordable Care Act reduced Medicare payments by adjusting rates to reflect greater productivity across the entire economy, where productivity gains are greater than in healthcare. The lower payments are projected to save Medicare $233 billion through 2019.

But unless hospitals' productivity actually improves, their margins will suffer. In fact, federal actuaries suggested that 15% of hospitals would be unable to break even after 10 years under the new Medicare productivity standard. “While such payment update reductions will create a strong incentive for providers to maximize efficiency, it is doubtful that many will be able to improve their own productivity to the degree achieved by the economy at large,” the CBO said.

Romley, working with Dana Goldman and Neeraj Sood, found hospital productivity increased 0.78% for heart attacks, 0.62% for heart failure and 1.9% pneumonia after adjusting for the severity of patients' illness and two measures of quality: mortality and unplanned readmissions. Without adjusting for either factor, hospitals' productivity treating patients with those conditions declined, 0.64%, 0.91% and 0.39%.

Other measures have failed to make those adjustments, Romley said, even though there is “tremendous variation in all aspects in healthcare including quality.”

According to the U.S. Bureau of Labor Statistics, hospitals and nursing homes grew 0.9% less efficient per year between 1987 and 2006 while U.S. manufacturers saw productivity gains of 1.37% per year during the same period. Meanwhile, Medicare's trustees project healthcare productivity will grow just 0.4% compared with 1.1% across the economy.

The takeaway for policymakers, Romley said, is that the adjusted figures suggest “that the old system overpaid” hospitals, so the ACA's cuts “are not the dagger at the heart of providers that one might fear.”

Productivity gains in healthcare have been difficult to achieve given the industry's reliance on labor to deliver medical services, economists say. Other industries such as manufacturing can more easily reduce labor costs with automation and technology improvements, but healthcare requires people to deliver medical care and there are limited opportunities for technology to reduce those costs.

Technology gains—new medical devices and pharmaceuticals—in healthcare also often accelerate healthcare spending. Incremental benefits from new medication, for example, often come with high prices, said Charles Roehrig, director of the Altarum Institute's Center for Sustainable Health Spending.

“Our reluctance to withhold the highest quality service from anybody ensures that the standard of treatment is always going to be the newest technology, and the newest technology is almost always expensive, because it's under patent,” he said.

Follow Melanie Evans on Twitter: @MHmevans






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