Author
Shahzia Teja, M.A., B. Comm.
Introduction
Productivity improvements are a key to economic growth. It is therefore significant that Canada’s economic productivity has lagged other industrialized countries. Moreover, while productivity growth has been slow for the Canadian economy as a whole, it has been particularly anemic in the health care and social services sectors. Paradoxically, lagging economic productivity in health care has coincided with continually improving health outcomes for Canadians. It is important to understand the nature of the apparent disparity between productivity in the health care sector and total industry, as well as the reasons for productivity lags alongside improving health outcomes.
Objective
This paper discusses the lost efficiencies and missed economic opportunities that are implied by lagging productivity in health care in Canada and draws conclusions about the lessons for achieving sustainable rates of growth in health spending and capturing societal economic gains. It presents available data on productivity growth in the health care sector versus total industry in Canada, and discusses factors affecting productivity growth in health care, including the divergent impact of technology on health outcomes, as well as the particular effect of incentives and organization of health care in Canada; and explores implications for the sustainability of total health costs, and unrealized economic potential in the health care sector.
Data
All data have been obtained from the Centre for the Study of Living Standards, the Canadian Institute for Health Information and Statistics Canada.
Results
Overall, between 1987 and 2006, MFP for total industry grew at an annual rate of approximately 1.1%, with a slight acceleration in the latter decade. By contrast, over the same period, NAICS 62 showed average annual declines in MFP of 0.4%, with the declining trend accelerating in the latter decade. Meanwhile, Canadians have experienced improving health outcomes over the same period.
Conclusion
The findings are consistent with the economic theory known as Baumol’s Cost Disease, which suggests that labour productivity gains in healthcare are elusive, thus explaining why it is so difficult to bend the total healthcare cost curve down. The implication of this finding is that the solution to the sustainability challenge in healthcare is to be found in policies that focus on achieving labour productivity gains – not in rationing access to medical goods and services. Economic theory suggests that increasing the substitution of technology for labour and more efficient organization of production are the way to achieve productivity gains. A successful policy-framework should align incentives to favour the adoption of technology and to create constant pressure to improve the organization of production. Competition in the delivery of medical services, removal of barriers to the supply of medical services, the introduction of real price mechanisms to regulate demand and supply, and encouraging investment in technologies that more efficiently achieve desired health outcomes and/or lead to labour savings are approaches that can unleash productivity growth in health care and improve the sustainability of the health care system while realizing the full economic potential of the health care sector.
