How to Answer America's Productivity Challenge

Generally speaking, there are two ways to grow an economy: You've either got more workers (higher employment) or you've got more work per worker (higher productivity). As the boomers gray, our labor force will grow slower. As a result, we need to rev that productivity engine, according to the McKinsey Global Institute.

In the last few years, higher productivity has probably hurt employment, because big companies who laid off thousands of employees found out they could squeeze more work from fewer people. But don't be fooled: Rising productivity across the economy is almost always good for employment and living standards, because it lowers prices for consumers so we can spend our money elsewhere. For example, since 1990, higher energy efficiency in California led to $56 billion in savings that Californians used to buy more labor-intensive goods and services, which ultimately produced millions of jobs.

Productivity contributed 80 percent of annual GDP growth in the 2000s, but our economy took a sharp in the last decade according to a new report from MGI. Whereas in the 1990s, productivity growth and employment growth went hand in hand -- especially in large-employment retail and high tech -- in the 2000s, the largest productivity gains came from sectors that experienced substantial employment reductions. "Computers and related electronics, the rest of manufacturing, and information sectors have contributed around half of overall productivity growth since the turn of the century but reduced employment by almost 4.5 million jobs," McKinsey reports.

In short, the last decade saw productivity gains come from sectors with slow job growth. In the next decade, job growth is projected to come from a sector with one of the slowest productivity gains -- health care.

Health care is growing more than twice the rate of inflation, but it is one of the least productive industries, as measured by McKinsey. "At some hospitals, less than 40 percent  of their time is spent with patients and the rest on tasks such as paperwork," the report states.

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How do we introduce market principles and productivity to the health care sector? The folks at McKinsey, who know a thing or two about productivity, have some suggestions:
Hospitals are a prime candidate for some of the operational improvements learned  in other service industries. Virginia Mason Hospital in Seattle, for example, analyzed patient flows in its emergency department and created a system that allows the hospital to ensure optimal staffing levels. The hospital also introduced a "team sort" process to quickly filter incoming patients by the severity of their condition. This has allowed the hospital to admit and discharge patients requiring only minimal treatment without sending them to patient-care beds. In two years, these two measures have reduced by 90 percent the number of hours the emergency department was too crowded to receive new patients.

Another area of opportunity for hospitals is purchasing. US hospitals have not universally  implemented best-in-class procurement policies, including pooled purchasing. This practice combines small purchases from different departments or different hospitals in a system into one large purchase to take advantage of scale and reduce time spent on purchasing processes. Where used, such policies reduced costs by 5 to 10 percent on what can amount to one-third of a typical hospital's budget--or 1.5 to 3 percent of total costs.