Productivity Perplex

by Martin Harris

In the popular understanding of economics, it’s largely accepted that American agriculture is the paragon of productivity gains which has enabled ever-lower (and mostly un-appreciated by urbanites) consumer food prices even as the percent of population engaged in farming declined from near 90% at the birth of the Republic to less than 2% today. In the last half-century or so, corn yields per acre have grown (pun intended) from about 40 bushels to about 160, while, in the last century or so, labor-per-100-bushels has shrunk from nearly 100 hours to below 3. Overall, urban consumer households now budget less than 10% of income for food: as recently as 1950 it was near 25%. Producers have been “rewarded” for this impressive productivity accomplishment with farmgate commodity prices typically below cost-of-production, which explains both the politically-inspired crop-subsidy payments, to prevent discouraged-producer quits and resulting higher consumer food prices, and the increasing dependence of farm households on off-farm income to prevent bankruptcy. In contrast, it’s largely unaccepted, although mathematically proven by numerous researchers, that American public education is the paragon of productivity shrinkage as staffing and costs have multiplied while student achievement has either shrunk, as the curriculum-dilution argument goes, or stagnated as the Federal achievement test scores for the last 40 years have shown. One stat frequently documented is a 70% productivity decline: you can see the charts in the MW Hodges Grandfather Education Report on the Web. Up to now, the question of industry productivity trends hasn’t been asked in the context of the national health-care debate. But now it has.

Until recently, the standard argument for government-managed single-payer (or Fabian-Socialism steps leading thereto) has been universal access/universal enrollment/universal service-delivery efficiency, supposedly to be achieved by voluminous legislation; and the standard argument for private-sector medicine with beneficial competition, innovation, and government involvement limited to low-income subsidy, to be achieved by the usual range of free-market principles. Unlike farmers, the medical profession has declared, doctors will neither operate with inadequate Federal payment schedules and politically-driven subsidies, nor will they put other family members out to work to subsidize the unprofitable practice of medicine. They’ll just retire early, quit in mid-practice, or cancel their med-school career plans. And, perhaps as proof, there’s already been a substantial MD rejection of under-reimbursed Medicaid and even MediCare patients, as well as practitioner migration from private practice to institutional employment.

In this context, “The Great Unmentionable: the Role of High Salaries and Wages in Health Care Inflation” plows new ground (a little ag anology there) in popular instruction (a little ed analogy there) in economics in general and the productivity question in particular. The Eli Lehrer piece was published in the 30July/6Aug issue of The Weekly Standard. He quotes the Brookings Institution study of the subject as follows: “health care pays higher than average salaries regardless of workers’ skills and demographic characteristics”, and goes on into comparisons of nurses’ and teachers’ academic credentials and pay-scales, actual health outcomes (it’s now widely accepted that the wide majority of health-care costs is triggered by self-destructive future-patient behavior), unimpressive measures of system outcomes, “…below average for wealthy countries…” and then gets into the quintessential productivity question: hours of labor per unit of output. Lehrer writes, “While other countries average just a little over three hospital staff per bed, American hospitals have more than five people for each bed…there’s no evidence that the enormous labor costs are producing world-beating outcomes.” That’s not unlike your Humble Scribe’s observation that Utah’s K-12 schools, with a class size of 22, get more student-achievement productivity, measured in hours, dollars, and test scores, than Vermont with 11.

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Lehrer then continues with statistical discussion of some of the usual expense arguments –cost of medical education, cost of liability insurance, reduced cost of delegating procedures to aides and assistants, reduced costs of provider competition– which are not easily summarized here, but well worth reading in full. His productivity argument, on its negative side, uses the K-12 comparison without actually recognizing it, and on its positive side uses the agriculture comparison –when productivity increases, consumers are the eventual beneficiaries—without actually recognizing it either. Nor does he discuss how “Differentiated Staffing” (my label, borrowed from education, for his argument that productivity can and should be enhanced and costs reduced by delegating services appropriately to lesser-skill, lesser-pay providers) without regulatory changes enabling just such management strategies. He should have: the success of DS at the college level has long been a well-known academic phenomenon, jokes about starving grad students teaching fifty classes a week notwithstanding, and the rejection of DS in the K-12 sector, not as well-known but equally evident, is an historical fact in present-day classrooms even though it enjoyed widespread acceptance in pre-Horace-Mann-model classrooms, and is better known overseas as the Lancastrian System, with master and junior teachers and aides.

Nor does Lehrer get into (space restraints, maybe?) the nexus among customer choice, provider competition, and productivity gains. For education, it was analyzed in detail by Carolyn Hoxby, and even though publication of her studies earned her the Harvard displeasure and cost her the Harvard paycheck, the findings remain unimpeachable, and could readily have been applied to the health-care question. Missed opportunity. But then, if the productivity question is, fairly quietly so far, under study at the (dare I say Left-leaning?) Brookings Institution, and the subject of commentary in the (dare I say Right-leaning?) Weekly Standard, is it not a subject just beginning to attract public attention? Humble Scribe wish: multum magis adventum There’s a lot more coming, even if it’s not OK to use “perplex” as a noun.