Is the Cost Disease in U.S. Hospitals a Misdiagnosis?

Within the service sector in general and health care in particular, productivity growth is often believed to lag improvement in the rest of the economy.  The Affordable Care Act reduces Medicare reimbursement of hospital care according to recent growth in private nonfarm business productivity, measured at 0.5% per year for 2014 payment purposes.  We analyze productivity trends in hospital care, focusing on Medicare patients admitted for a heart attack or pneumonia over 2002-2011.  We measure hospital output based on both quantity and quality, with the latter defined by 30-day survival; in addition, we account for patient health and hospital inputs, as measured by inpatient costs.  We find that productivity grew by 0.74% per year for heart-attack care and 0.65% per year for pneumonia care over the period studied, and that this finding is robust to a variety of alternative specifications.  However, when we measured hospital output by quantity alone, productivity appeared to decline by -0.81% for heart attack, and to increase by only 0.16% for pneumonia.