Knifonomics (part 32): the NHS meets Baumol’s cost disease.

This is in no way an original post. However, it’s a timely one.

William Baumol: too smart for the NHS
William Baumol: too smart for the NHS

For those of us in the NHS at its sharpest end – we do busy on-call, we do emergencies, we stick knives into people who are trusting us to do the right thing – there’s apparently a productivity problem.

It’s not a problem for us personally, usually, and it’s not even a problem at all, if you correctly view healthcare as dealing with emergencies and life-threatening conditions first, in any rational prioritisation. However, that usually excludes politicians and civil servants, who these days virtually all have an accountant’s view of valuing the service. Unless of course something comes along like the Francis report.

Actually that report’s media profile possibly wouldn’t pass muster at the most basic level, depending on how you view it. To claim up to 1200 ‘unnecessary’ deaths would really mean having 1200 inquests, or fatal accident inquiries. The eyecatching figure is based on a statistical interpretation that I suspect is overcooking it, even if the pastoral and nursing care was at times grievously lacking.  As Robert Francis himself said:

..it is in my view misleading and a potential misuse of the figures to extrapolate from them a conclusion that any particular number, or range of numbers of deaths were caused or contributed to by inadequate care….it would be unsafe to infer from the figures that there was any particular number or range of numbers of avoidable or unnecessary deaths at the Trust.

I digress, but not much, as it’s back in the news, and this whole thing is going to run for a while yet.

in 2004 the new Consultants’ Contract (negotiated by the BMA with the Labour government) gave us all a decent pay rise. It also sharply defined what we actually do at work, for the first time. I’m obviously biased, but its effect was to bring us nearer to what we should be earning. Pay had lagged behind other groups badly (as it is right now, with austerity). This inevitably lead to the accountant’s attitude mentioned above, in judging output and outcomes.

Which brings us to Baumol.

Baumol (now 91) is an American economist. His brilliant analogy in the ‘cost disease’  concept is spot on:  a Mozart string quintet was composed in 1787,  226 years later, it still requires five musicians and the same amount of time to play. However, the musicians are getting paid a lot more for the same productivity.

On the other hand, manufacturing – as one obvious example – is now massively more efficient. For the same salary you can make far more cars, or widgets, whatever, than you used to. Similarly for most aspects of farming. All are big ticket issues that profoundly influence the economy.

The NHS does indeed profoundly influence the UK economy. So are we musicians or farmers? The civil servants want us to be the latter. When we’re doing our emergencies and cancer work, we’re the former. When we’re doing our planned elective work, we’re  bit of both.  As one American writer put it:

Cost disease helps explain why low-income Americans can now afford flat-screen televisions that were out of reach a decade ago, but health insurance that was unaffordable in January 2000 remains unaffordable in January 2010. At the same time, demand for health care never lets up. So while slow sales of video games or clothing can reduce prices, health care prices never ease. And while the robots that help build cars have replaced human beings on the assembly line, robots that help out in modern operating rooms are not as economically efficient.

So, if you work in the NHS, you get driven mad by the downward pressure to realise ‘efficiency savings’, even though the very nature of much of the work precludes this. It’s a  bit like telling Mozart’s musicians to play faster so that they can squeeze another piece in.  The way to save a lot of money in the NHS is not  so-called efficiency, rather it’s cutting big items of pointless expenditure, and any doctor could tell you where to start.  One colleague who told me 5 years ago that he could knock 25% off the local budget with no detriment to patient care is still saying that. He’s right.

When you cut real clinical work though, which is the obvious target of the simple minded ( as opposed to iPads), then as Francis says:

Problems at the Trust were exacerbated at the end of 2006/07 when it was required to make a £10 million saving. The Board decided this saving could only be achieved through cutting staffing levels, which were already insufficient. The evidence shows that the Board’s focus on financial savings was a factor leading it to reconfigure its wards in an essentially experimental and untested scheme, whilst continuing to ignore the concerns of staff.

I finish by quoting at length from a very fine summary of all this from Douglas Walker in the US:

While many people who work in sectors experiencing high-productivity growth such as manufacturing lose their jobs to automation, those that remain are paid more and average incomes rise. The huge and growing output of manufactured goods resulting from the growth in productivity tends to saturate the market for these products and the income elasticity of manufactures — their responsiveness to increases in income — falls with time. 

In contrast, in the more service-oriented sectors productivity gains are difficult to realize. Workers in these sectors nonetheless experience rising wages because they have the option of working in other occupations, and will leave if they are not adequately compensated. Moreover, many of these workers are also highly educated and would be difficult to replace should they resign. This also tends to keep their wages high. The service sector also benefits from a high income elasticity of demand as people choose to spend a growing proportion of their rising incomes on health care, education and other labor-intensive services where productivity gains are difficult to generate. 

What this means is health care costs are high and rising because they involve high labor skills and direct personal attention and cannot be easily reduced by automation or spreading the costs over more people. Like a Mozart string quintet, a certain number of workers must be involved and the time taken to treat a patient, like the time it takes to play the music, is fixed and cannot be reduced. (But, let me note, that while it costs the same to produce the music from the string quintet, once recorded music it is much cheaper to consume today than it was in 1787, where once heard the music was lost. Now, the recording can be replayed at almost zero marginal cost. Unfortunately, this is not the case with health care where each “performance” is tailored to a specific individual and their unique condition.)

It is a mistake for Congress and the Administration to imply that public policy can do much to reduce health care costs or the general efficiency of the health care sector. Compared to other sectors of the economy the potential for productivity advance in health care is low and any expansion in the delivery of health care services will inevitably raise the share of health care in the economy and the expenditures of government to support it.

Talk by politicians about lowering health care costs is easy. Because of the nature of these costs, they will find actually accomplishing this goal is very, very difficult.

However, if you want to make a start, ask a doctor.

Preferably a surgeon.

Not someone from Public Health.

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2 thoughts on “Knifonomics (part 32): the NHS meets Baumol’s cost disease.

  1. You’re almost there. Almost. You’ve understood Baumol right up to the point of the implications of it all.

    “Like a Mozart string quintet, a certain number of workers must be involved and the time taken to treat a patient, like the time it takes to play the music, is fixed and cannot be reduced.”

    That’s not actually true. Because of this:

    “(But, let me note, that while it costs the same to produce the music from the string quintet, once recorded music it is much cheaper to consume today than it was in 1787, where once heard the music was lost. Now, the recording can be replayed at almost zero marginal cost.”

    An aspirin is the automation of the treatment for a headache. Home testing kits and sugar strips (?) are a productivity advance on previous methods of treating (or managing) diabetes. A vaccine is a productivity improvement on caring for kids brain damaged with measles.

    “It is a mistake for Congress and the Administration to imply that public policy can do much to reduce health care costs or the general efficiency of the health care sector.”

    Therefore that is incorrect. We can improve productivity in health care. Sure, improving productivity in services is more difficult than in manufactures: but it is possible.

    Which takes us to the other half of Baumol’s work: what set ups and systems lead to greater improvements in productivity?

    Actually, market ones do this vastly better than centrally planned or other non-market ones.

    And that’s why we want a market in health care. To overcome Baumol’s Cost Disease.

    1. We’re in agreement Tim. My reference was to Baumol within the current flawed NHS structure. It actually shows up just how much of a failing command economy the NHS is, despite generally good standards (even with this week’s newsfeed). I have to put up with this nonsense as a full time clinician, but I retain a management interest that at least gives me a voice. I quite agree that a bit of marketisation would help. Anyway, you’re the man when it comes to blogging on real life economics, so I appreciate your comments

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