The chart comes from Dan Diamond. Pointer from Tyler Cowen.
Let’s pretend that health care is the whole economy. The top line is the growth rate of nominal GDP. The lower line is the growth rate of employment. Growth in nominal GDP is growth in real GDP plus inflation. Growth in real GDP is growth in number of workers plus growth in output per worker. Inflation is growth in compensation per worker plus growth in the price markup over compensation. Putting this all together, we have
growth of nominal GDP = (growth of number of workers + growth of output per worker) + (growth of compensation per worker + growth of the price markup over compensation)
Scott Sumner would say that the two most reliable numbers here are the ones shown in the chart–growth in nominal GDP and growth in the number of workers. The division between nominal GDP and real GDP depends on making the correct quality adjustment for prices, which Sumner would argue is much less reliable than the other two measures. (I think everyone would agree that quality-adjustment is less reliable, but some of us prefer to believe that it is not much less reliable.)
The difference between the two lines on the chart consists of productivity growth, wage growth, and growth in the price markup. Diamond says that wage growth does not account for the slowdown in nominal GDP (although wage growth did decline–I think by about a percentage point, based on the data in Diamond’s link). He alludes to a mix shift. If people shift away from prescription drugs and toward other services, those other services could have lower productivity and/or a lower price markup.
In any case, it looks as if either productivity growth has declined or the growth in the price markup has declined. This should show up as a decline in corporate profits in the health care industry. Can anyone find data? I have trouble navigating the Commerce Department’s web site.
I did stumble across this paper, which tries to decompose the rise in health care spending from 2003 to 2007.
Our decomposition also sheds light on productivity in the treatment of cancer. Over the four-year sample period, expenditure per capita rose twice as fast for malignant neoplasms (48 percent growth in expenditure per capita) than non-malignant neoplasms (24 percent growth in expenditure per capita). A large reason for the discrepancy is the difference between growth in the cost of treatment (that is, expenditure per episode of care). Service prices for malignant neoplasms grew over twice as fast as service prices for non-malignant neoplasms. This may indicate that more expensive and innovative services are playing a role in cancer spending growth.
This is interesting, but for present purposes it is of little use. The chart above shows a slowdown in the rate of growth in overall health spending between 2003 and 2007.
But my main point is that we expect nominal GDP growth and employment growth to line up. If they do not, something must be going on with either productivity, compensation, or price markups. This is a matter of accounting.
I have recently been told (but am unable to verify) that many of the lower level health care workers have learned how to “game” the system and increase their renumeration.
If this is true, and if the trend extends to the higher level workers, then the increased renumeration may explain the increase in expense without an increase in productivity or employment.
That is two ifs and a may, by the way.
Well, it’s not scientifically valid, but I did have dinner last weekend with a friend who is a CEO of a 2000 person HC provider, and he would tell you that margins are being squeezed mercilessly. Overhead is enormous – 80% of his employees are NEITHER doctors NOR nurse-practitioners. Consolidation is going to come very fast, and a decade from now, there will be less than 100 healthcare providers in the United States. He plans to run one of them.