Health Care: Great for the Economy Today, Terrible Later

ASSET AND LIABILITY

Many of the same factors that propelled Pittsburgh’s economy are driving the nation’s health-sector growth. As the population ages, demand for health care rises. Electronic records and new payment systems are encouraging hospitals and providers to merge, creating large integrated systems, even as manufacturing’s job base shrinks. Hospitals have been eager to take credit for economic growth: A report published by the American Hospital Association last week estimated that hospitals alone provide 5.5 million jobs nationwide and “create $2 trillion in economic activity.”

Yet cities won’t be able to ride a health care employment wave forever. Although Pittsburgh has used the industry to bring federal tax dollars into its local economy, those streams are drying up. The Affordable Care Act will lower future hospital payments, and proliferating new payment models are designed to encourage more efficient care around the country. The ongoing deficit debate suggests that funding streams from Washington may dwindle even more: Any big entitlement-reform deal will mean significant reductions in long-term Medicare spending. If automatic spending cuts kick in next month as part of the federal budget sequester, they will zap not just Medicare reimbursements but also the NIH grants that keep the Pitt labs humming. “We’re really running happily in this protected bubble,” says Dr. Wishwa Kapoor, a professor and the director of the Center for Research on Health Care at the University of Pittsburgh. “But things are going to fall apart.”

Across the country, growth will likely be constrained by what communities can afford. Unlike manufacturing, health care is generally not an export business: Patient care is provided in the community and must be paid for with local resources. “What you’re doing is passing some money from one person to another,” says Martin Gaynor, a health economist at Carnegie Mellon. That imposes a wealth-based ceiling on every region’s health sector.

Pittsburgh is already struggling against those limits. As the health care industry grew so quickly, it relied on higher-than-usual utilization of services. Local patients get 47 percent more advanced imaging procedures than people elsewhere, according to an analysis by the BlueCross and BlueShield Association. They get 44 percent more lab services and 27 percent more outpatient surgery. Pittsburgh also records more emergency-room visits and hospital “bed days” than comparable cities, according to a recent Dartmouth College study.

In the current system, where insurers pay providers for each test and surgery they perform, more services mean more revenue. (But they don’t necessarily produce healthier patients: Allegheny ranks in the bottom half of Pennsylvania’s counties on a series of population health measures conducted by the Robert Wood Johnson Foundation.) The new models are meant to clamp down on unnecessary care by paying providers for health outcomes instead of treatments. If they work, they will reduce the profitability of all those MRIs and blood tests.

In the meantime, high utilization makes health insurance expensive for local businesses. An analysis by the Milliman Group found that the average Pittsburgh resident spends 25 percent of her income on insurance—substantially more than in similarly sized cities such as Baltimore, Cleveland, Philadelphia, and the Washington metro region. “It makes the region far less competitive for businesses” that could open elsewhere, says Harold Miller, president of the Pittsburgh-based management consultancy Future Strategies. He says that executives in large companies have told him they declined to expand locally because of high health care costs. “Joe’s barber shop has to live with the fact that it might have high health care premiums, but a worldwide manufacturer says, ‘I’m not going to put a plant in Pittsburgh, because my health care costs may be higher here.’ ”

Those costs also make public-employee benefits pricey. The city has struggled to cover retirees, whose expenses, along with underfunded pensions, bankrupted the city about 10 years ago. Now, health care for current and retired workers represents 10 percent of the city’s budget, without fully funding its future retiree benefit obligations, according to an analysis by Public Financial Management, a public-sector finance consultancy. The strain has led Pittsburgh to postpone road-paving, scale back public transportation, and avoid other infrastructure improvements. The fact that the hospitals and universities pay no taxes—they’re nonprofits—hasn’t helped.

The high and rising costs of the U.S. health care system have also driven up the cost of labor, making American workers expensive in comparison with foreigners. The United Steelworkers is still based in downtown Pittsburgh, in a skyscraper with an elaborate steel façade, but its footprint has shrunk. Leo Gerard, the union’s international president, cites health care costs as a key factor sapping its clout in negotiations with employers. He estimates that businesses that employ American workers begin with an 18 percent disadvantage compared with other Western countries, where health benefits are less expensive. “You can’t sustain an economy over an extended period of time where you’re relying on middle-class consumers, health care costs have double-digit increases, and wages are declining or stagnant,” Gerard says. The mounting costs have essentially erased U.S. income gains over the past 10 years, according to a Rand study.