Human capital, endogenous growth and hospital performance

In the health economics literature we often treat a hospital as a healthcare producing ‘firm’. We define cost-functions and perform efficiency analysis, for example. However, this sort of analysis is certainly hampered by the difficulty in measuring healthcare production. One of the inputs to a hospital production function is human capital and as such I was curious to learn whether theories of endogenous growth had been applied to increasing hospital productivity. Admittedly my literature search has been somewhat lacklustre but I have not yet found anything on this topic. So, here, I will explain why I think this could be an interesting area of exploration.

Human capital, being a somewhat fuzzy concept, is difficult to empirically examine. Even so, it is expected that a firm should perform better when its employees have more human capital. In a general sense, human capital can be gained through education, knowledge spill overs, or by learning-by-doing. In a hospital, staff with greater experience should produce more healthcare, which should translate as reduced mortality or reduced length of stay (Bartels et al (2011) did find this to be the case with nursing staff, for example).

Human capital is developed for specific tasks, not only in clinical procedures, but also in team organisation and functioning within a specific hospital and unit. Kim (1989) and others distinguish between intensive and extensive human capital:

The former is a stock of specialized knowledge and skills that improves worker productivity in a given production activity; the latter is a stock of general knowledge that renders the workers more adaptable to a variety of activities. Mohtadi and Kim (1992)

In this way the specialist is then more productive (and thus commands a higher wage) for the given set of tasks in which she specialises. Within the NHS there has been a drive for specialist nurses who practise a specific area of medicine, and indeed they are on a higher pay band than their generalist colleagues. Moreover, these nurse specialists lead to a demonstrable reduction in mortality (i.e. increased healthcare production) (see this example)

Becker and Murphy (1992) suggest that the degree of specialisation is determined at the equilibrium of the marginal return to specialised knowledge and marginal costs of coordinating specialists. This would explain why we don’t get specialisation to an extremely high degree, such as one nurse or doctor for every procedure.

The human capital generated in hospital units through experience can spill over. New members of the team can learn from older members; innovations in organisation can be shared. Thus, there should be a general accumulation of human capital over time, leading to increased productivity over time. This is endogenous growth.

It can be shown that hospital productivity has increased over time, and that there has been an increase in diversification of medical fields. The former may be explained by other theories of growth, and the latter by supply induced demand. Either way, I think it is an interesting hypothesis.

If you know of any literature on this or refute this idea, don’t hesitate to say so.

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