Australia’s productivity growth has been stagnant for over a decade and, according to a new report, our health policies and programs could be partly to blame. Released today, the Productivity Commission report also highlights how the health-care sector (among others) could play a starring role in improving productivity.

The commission has offered a short list of thematic directions for reform. In health these include eliminating low-value services that have uncertain clinical impacts, changing the way services are delivered to focus more on the patient, and moving away from a community pharmacy model to more automatic dispensing in a greater range of more convenient locations.

The underlying message is that productivity growth is essential if Australia is to expand its economy, generate opportunities for real income growth and raise community living standards.

But as a Productivity Commission discussion paper released last November noted, there is a justified global anxiety that growth in productivity — and in income and well-being, which are inextricably linked to it over the longer term — has slowed or stopped. Across the OECD, growth in GDP per hour worked was lower in the decade to 2016 than in any decade from 1950.

The commission notes that labour productivity has been rising, but that has more to do with greater capital investment than more efficient workforce practices.

The report also highlights a change in thought about productivity. The emphasis has shifted from the need to produce goods more cheaply to improving our human capital – the knowledge, skills and work practices of our community – and delivering more efficient and effective health, education and related services.

The change recognises that Australia is now predominantly a service economy, that health care is a significant economic service, and that the productivity of our workforce, including its health, needs to underpin our economic growth.

The health sector is big and still growing

The health sector is a big part of our economy and still growing as a proportion of our overall economy. By 2016, according to the OECD, it accounted for 9.6% of our total gross domestic product.

This is similar to that of New Zealand and the United Kingdom, less than Canada and far less than the United States – which is an international outlier at over 17% of its total domestic output. Add aged care and disability services, and the commission puts the figure at 13% of Australia’s GDP.

We continue to spend ever more on health, in real (inflation-adjusted) terms, both as taxpayers and as consumers. But are we getting good value for our money? An inefficient health system, wrongly priced services and poorly designed system incentives all drag on the cost of health care and on the productivity of a very large sector of the economy.

A decade ago, the health-care and social-assistance sector employed nearly 1.07 million people. This was a little less than retailing (1.21 million) and a little more than manufacturing (1.03 million). The health sector employed 10.3% of the Australian workforce.

Fast forward to 2017 and retail employment has stayed relatively stable at 1.26 million and manufacturing has declined to 0.9 million. In contrast, health care and social assistance has risen to 1.64 million – 13.3% of total employment.

Any opportunity to increase the efficiency of the health workforce will translate directly to greater labour productivity for the economy as a whole. And its effectiveness can be improved, in part by education and training, which improves the skills of our doctors, nurses, allied health workers and others to work collaboratively to deliver patient-centred care. This is the subject of an independent review for the COAG Health Council by this article’s author.

The actual productivity of the health workforce, unfortunately, is notoriously hard to measure. This is due in no small part to the lack of market forces and to wage costs that are often negotiated between unions and their employers – the governments.

The Productivity Commission’s forthcoming report on improving markets and competition in health and other human services will hopefully offer useful guidance on what reforms are needed in some of these sectors.

Workforce health is an important part of our human capital

A third role for a more efficient and effective health sector is to contribute to improving the health of the workforce overall. Education and health are recognised as the two most significant building blocks of human capital. Making the most of our human capital is a central message of the OECD’s research on productivity.

There is also ample evidence, including in the new Productivity Commission report, that poor health leads to poor labour market outcomes. A 2013 study into disadvantage in Australia concluded that people with long-term health conditions are likely to experience deep and persistent disadvantage, but, equally, disadvantage can lead to poor health.

Back to the future

The challenge remains to reform the health system, and its workforce in particular, so that practitioners, administrators and others have the skills, knowledge and professional attributes to meet the emerging health-care needs of our community.

As the Australian Institute of Health and Welfare points out in its latest review of Australia’s health, the community’s burden of disease is changing. There is now a greater need for longer-term integrated care and efficient support coordination to deliver services for those with chronic diseases, the elderly, those with dementia, disability and poor mental health, and to provide services to those in rural areas and remote communities.

The message in this latest report is welcome, but unfortunately it is not entirely new. A Productivity Commission report over a decade ago made the point that Australia’s growth potential will depend increasingly on making the best use of our human capital.

One of the aspirations at that time was for an agreed agenda of integrated health services reform within a national framework. It was seen as a way of adding much-needed impetus to overcoming long-standing structural problems that prevented the health-care system from performing to its potential.

Little progress has been made since then. Hence this report is important in reinforcing the message that the next big gains in productivity will need to come from reforming the delivery of health and education. Let’s hope the call for a shared agenda of reforms is taken up more actively than experience to date might suggest.