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Australian healthcare productivity measures up

8 May 2024

The slow growth in productivity is a worry for all of us. Low productivity growth can increase pressure on inflation and limit long-term wage growth.

New research from the Productivity Commission shows that, at least when it comes to healthcare, the way we measure productivity might not be telling the full story.

In fact, when you account for the quality of our healthcare sector, this research shows Australia’s healthcare system is among the most productive in the world.

The full productivity story

Productivity is based on a simple formula: the amount of inputs that it takes to produce a given amount of output. For instance, you can roughly measure the productivity of an iron ore mine by finding the amount of equipment and labour (the inputs) that it takes for it to produce a tonne of iron ore (the output).

This mostly holds true for traditional market-based industries, but today an ever-larger share of our economy is devoted to non-market services like aged care, healthcare and education. So how do you measure the productivity of a hospital?

To date, most economists have answered this question by looking at the resources it takes for a hospital to provide a particular healthcare service. Following this methodology, our healthcare sector is more productive if, for example, the average hospital visit is shorter. When we measure hospital productivity this way, estimates indicate that it grew at 0.1% per year between 2008-09 and 2018-19 ­– well below the market sector average of 0.7% per year.

But this approach ignores the crucial question of healthcare quality. After all, a system that gets people in and out of hospital quickly is not much good if it doesn’t effectively treat their illnesses. Intuitively, we know that healthcare today is better than it used to be – most of us would rather go to hospital now rather than 20 years ago – so shouldn’t this inform our assessment of productivity?

Accounting for quality

In recent years, new methods have been developed in the United States that do exactly that ­– capturing changes in the quality of healthcare, indicated by changes in health outcomes for patients. They also capture changes in the number and mix of services that patients receive. If improved cancer treatment improves survival or quality of life, that is productivity growth. If cancer care is moved from expensive hospitals to lower-cost community nursing, with the same outcomes, that is productivity growth.

The Productivity Commission has applied the new methods to study the productivity of about one-third of Australia’s healthcare sector by spending ­– healthcare used to treat cancers, cardiovascular diseases, blood and metabolic disorders, endocrine disorders, and kidney and urinary diseases.

The results are stark ­– we find that healthcare productivity grew at a healthy 3% per year between 2011-12 and 2017-18, driven almost entirely by quality improvements. Healthcare got better at keeping people alive, although it didn’t improve at boosting quality of life. The studies from the United States that inspired our work have found quality improvements of a similar magnitude.

The Commission also benchmarked the level of Australia’s healthcare productivity against that of other countries and found more good news ­­– Australia’s healthcare sector ranked third of 28 high income countries for healthcare productivity between 2010 and 2019.

Does this mean that our worries about productivity (and the productivity of the non-market sector in particular) are wrong? Sadly, it’s unlikely, although lots more research is needed.

Would we rather to send our children to school or university today than in 2011? Or would we rather to send a loved one to aged care today than in 2011? It’s not obvious. We probably haven’t seen the same improvements in those other sectors that we have in healthcare.

Much of the improvement in healthcare has come from quickly adopting new treatments as they become available; our healthcare sector is (as others are) cumbersome and riddled with inefficiencies. Without the breakthrough innovations, it’s unlikely that we would have seen the same productivity growth.

We still need to address the cost pressures in our health system; even with quality improvements, we can’t allow health costs to keep growing as a share of GDP. Still, it’s a piece of very good news when we desperately need it.

This article was written by Commissioner Catherine de Fontenay.