Nearly 5 million Americans were employed at hospitals in November, and the industry is on a hiring tear lately. The Bureau of Labor Statistics recently reported that hospital jobs increased 3.5% in the past 12 months, marking the most robust period of employment growth the industry has seen since 1991. While this trend bodes well for nurses, physicians and other hospital staff, it suggests that U.S. hospital spending may be poised to reaccelerate, and it raises questions about labor productivity in this sector.
Demand for healthcare services, including hospital care, has risen in recent years, owing to decreases in the uninsured rate, increases in the number of Medicare beneficiaries, and a rise in the prevalence of chronic diseases. But rising demand for a good or service tells us nothing about the impact on labor demand in that industry. For example, U.S. domestic auto production is about the same today as it was in 2005, but employment in the U.S. auto sector is down about 15%. More broadly, U.S. manufacturing output is at an all-time high while employment in the industry is near 1940s levels. Both cases can be explained by an increase in labor productivity—that is, the amount of “output” per hour worked.
Hospital labor productivity is notoriously difficult to assess. Measuring the quantity of labor utilized is not complicated. According to BLS, in the period 1993-2012, total private community hospital employment increased 28%, while total hours worked by private community hospital employees rose 34%.
But measuring hospital output is a challenge because hospitals provide different types of care to different types of patients, and the mix of services rendered and the patient mix both change over time. A new BLS index of labor productivity for private community hospitals addresses the challenges inherent in measuring hospital output by basing output on completed courses of treatment and adjusting for disease severity. In this framework, hospital output is determined by combining an outpatient services index (which increased 91% between 1993 and 2012) and an inpatient services index (which increased 28% during the same period). Based on these indices, total hospital output is estimated to have increased 48%.
Taken together, output and labor input at private community hospitals rose steadily between 1993 and 2012, but input rose more slowly. As a result, hospital labor productivity increased, but only by about 10%, which pales in comparison to labor productivity growth in the broader economy. And the increase occurred entirely in the 1993-2001 period. Private hospital labor productivity declined modestly from 2001 to 2012.
This decline comes at an unfortunate time for hospitals because the Affordable Care Act requires a downward adjustment to inpatient Medicare payments by any increase in the five-year rolling average of multifactor, nonfarm productivity, an economy-wide measure. While multifactor productivity is not directly comparable to labor productivity (it includes more input than just labor), it is certainly the case that efficiency gains across the entire economy bear little relation to the productivity gains within the hospital sector. This means that the ACA provision is reducing hospital payments under false pretense.
On a larger scale, the disappointing trend in hospital labor productivity coupled with evidence of a jump in hospital job growth suggests that aggregate hospital spending may be poised to surge. The situation is likely more complicated than that, but, given that hospital spending is projected to reach $1 trillion by the end of the year and that healthcare spending overall is again on the rise, policymakers likely will scrutinize all available data as they pursue policies to slow spending growth.
Unfortunately, the model underlying the BLS hospital labor productivity index, while robust, cannot capture important nuances in healthcare delivery, such as improvements in the rates of complications or increases in survival rates from medical procedures. And while a more efficient hospital is a worthy goal, these metrics tell us nothing about the progress toward helping patients avoid hospitalization. On top of this, the very nature of hospital care eludes—thus far, at least—the type of transformation that mechanization brought to U.S. manufacturing. While hospitals increasingly use technology, from electronic health records to MRIs, few innovations are true alternatives to nurses, techs and physicians. Until technology becomes a substitute for labor, the growth in the demand for hospital services will be met by trained healthcare professionals. At the same time, limited gains in labor productivity in the industry leave fewer financial resources to meet this demand. It's a knot that policymakers need to start untangling.
Alex Brill is a resident fellow at the American Enterprise Institute.