By Matthew Koch

Everyone knows that health care has a cost problem. But not everyone is aware of the underlying problem - labor productivity.

An economic measure that relates output to the labor hours used in its production, labor productivity in health care has lagged behind other industries for decades, contributing to rising health care costs.
Excessive administrative labor costs have burdened the health care system, limiting productivity improvements. Health care services companies could benefit from reorienting their business models around value to the customer.
Medical technology (medtech) companies can play a key role in this transition by offering broader services to hospitals and serving as trusted partners.

While health care experienced rapid employment growth from 1990 to 2010, labor productivity in health care was actually negative. Consider these facts from the Bureau of Labor Statistics:

1. Increasing labor productivity is good for consumers:
Prices tend to rise more slowly when labor productivity increases more rapidly
2. Increasing labor productivity is good for labor:
Real hourly compensation tends to rise when labor productivity increases
3. Increasing labor productivity does not necessarily mean job cuts:
No fixed relationship exists between employment change and labor productivity growth

Ten out of 16 health care workers are administrative labor; only six out of 16 are clinical labor. The business of health care is health care, not administration.

Labor represents over half of health care costs, and administrative labor is over half of the health care workforce. That administrative burden places a drag on labor productivity in health care. The solution to this problem is reorienting healthcare organizations around value to the customer.

Hospitals can take a cue from the 2014 Boston Consulting Group report on value-based hospitals, which highlights frontrunners such as Cleveland Clinic and Kaiser Permanente.

In contrast to the traditional hospital operating model - which features functional organization, narrow performance metrics, and a divide between management and clinicians - the value-based operating model is built around delivering health outcomes to patients.

Costs are allocated not to specialized units, but rather to activities and resources necessary for a given patient group across the healthcare delivery process.

The health care industry need not face this problem alone. In a survey conducted by the global management consulting firm L.E.K., 60 percent of hospital C-suite executives indicated interest in additional services from medtech companies.

Their top two services of interest were clinical IT and analytics and operations management and efficiency improvement. Since both services are correlated directly to labor productivity, medtech companies have clear opportunities to partner with hospitals to improve health care labor productivity.

By embracing the value-based business model, hospitals can reap the benefits of a revitalized organization that is firmly oriented around patient health outcomes.

A high-quality, high-productivity healthcare system is possible, provided that system is oriented around what matters most: the customer. Medtech companies can play a key role in this transition as they partner with hospitals through a broader range of service offerings.

Matthew Koch is a member of the Healthcare Policy and Strategy team at Siemens Healthcare.

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