Healthcare is not a low productivity industry
Is healthcare actually a chronically low productivity industry? Or are we looking at a strange accounting artifact, perhaps one that does not value not being dead.
It’s received wisdom that healthcare is a low-productivity industry.
I’ve heard it so often that it’s become second nature—an unquestioned fact, clearly something not worth re-examining from first principles. And over the years there have been many explanations for the plague of low productivity, the most famous of them being Baumol’s cost disease, which points out that:
“ … wages in sectors with stagnant productivity rise out of the need to compete for workers with sectors that experience higher productivity growth
Or, because medicine is so 'low productivity,' we have to pay doctors and nurses more just to stop them from jumping ship to higher-productivity fields—like private equity, enterprise sales, or social media. You know, places where we’re really making the world a better place.
But let’s take a step back and reconsider. Because oftentimes, when people insist there’s no debate—nothing new to be learned, nothing to “see here”—that’s exactly when we should take a second look.
After all, haven’t you ever wondered how healthcare productivity is actually computed?
In economics, the basic productivity formula is simply output divided by input. For example, in the ateliers of China where plastic petit-luxuries are lovingly crafted output is typically measured in total units produced or revenue generated, while input consists of fully loaded costs—labor, PP&E (property, plant, and equipment), overhead, and materials.
But what exactly counts as output and input in healthcare?
Lucky for us, Brookings wrote a survey paper about this very topic. In “Measuring Productivity in Healthcare,” Sheiner and Malinovskaya find:
“The traditional approach to measuring health care productivity typically defines output as spending on health goods and services—e.g., drugs, hospital services, physicians’ services— deflated by an appropriate price index to get a measure of real output over time.”
Woah! Did you catch it?
The positive externality of not dying (or being rendered unto rude health) is not accounted for in the traditional metrics.
Ignoring that very positive externality—arguably the fundamental goal of healthcare—warps the entire accounting system, leading to some somewhat perverse incentives. After all our cost centric model ignores whether or not spending actually improves
- The ER that stabilizes patients who require hospital stays looks less efficient than one that “churns” patients quickly—i.e., renders them unto death.
- Preventative care—public health initiatives, early interventions, exercise, and chronic disease management—barely registers as “productive” since its greatest value—keeping people healthy over the long-term—isn’t accounted for at all.
- In economies where high healthcare spending inflates GDP, inefficiencies are treated as economic gains rather than distortions..
Healthcare economists are typically not some wild gang of inchoately insipid mealy-mouthed morons, they are often quite clever. In fact, the Brookings paper points out there are a wide range of value-based measures of healthcare productivity nearly all of which could be expressed simplistically as:
\(
\text{Value-Based Productivity} = \frac{\text{Improved Health Outcomes} \ (\text{QALYs, Survival Rates, Fewer Readmissions})}{\text{Resources Used}}
\)
Where the QALY, or Quality-Adjusted Life Year is equal to:
\(
\text{QALY} = \sum (\text{LYG} \times \text{HRQoL})
\)
Where
LYG = Life Years Gained, and
HRQoL = Health-Related Quality of Life Weight
This is more than just an alternative metric—it’s a fundamentally different way of looking at productivity. Instead of fixating on how much healthcare costs, it forces us to ask: what are we getting for that spending? In other words—are all those non-dead folks in rude health a net economic benefit, or does our current accounting methods fail to capture their value?
It also makes clear that Baumol’s Cost Disease may be overstated, a distortion caused by how we measure productivity
This shift in measurement shouldn’t be confined to healthcare alone. Just as we redefined intellectual property accounting in the 2010s, we should be rethinking how we compute GDP itself. A QALY-based GDP forces us to confront an uncomfortable reality: we have spent decades mistaking rising healthcare costs for systemic improvements, even when outcomes don’t justify the spending.
In fact, such revisions could dramatically reshape global economic rankings, favoring countries that take healthcare more seriously over today’s GDP leaders—the US and China.
If economic success accounted for well-being rather than just spending and output, the global rankings might look very different—and the US and China might not hold their dominant positions. A QALY-adjusted GDP would:
- Elevate countries with efficient, outcome-driven healthcare systems—nations like Japan, Singapore, Scandinavia, and much of Western Europe, where healthcare spending is lower, but life expectancy, quality of life, and workforce productivity are higher.
- Expose inefficiencies in high-cost, low-outcome systems—such as the US model, which spends more per capita on healthcare than any other nation yet ranks below dozens of countries in life expectancy, chronic disease management, and population health.
- Reframe investment priorities—If health outcomes contributed to economic rankings, then investing in preventative care, public health, and long-term well-being wouldn’t just be a moral decision—it would be an economic strategy.
Imagine a world where economic power isn’t just measured by spending and debt accumulation, but by how effectively a country turns its resources into longer, healthier, more productive lives. In that world, the balance of global economic influence might shift in unexpected ways.
And then there’s the larger existential issue regarding productivity metrics. If they’re this obviously flawed in healthcare, what other sectors are infected by bad metrics masquerading as economic wisdom?
It’s probably time to check the books.