Code Red: Two Economists Examine the U.S. Healthcare System

December 13, 2011

Hobson’s Choice

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 10:33 am

I recently moderated a Crain’s Business Breakfast. The panel included four highly respected Chicago-area hospital CEOs. I questioned the panel on a wide range of topics, from near term operational issues to long term public policy concerns. One expects well-rehearsed answers from senior executives so I was pleasantly surprised by the thoughtfulness and thoroughness of many of their comments. I was rather looking forward to how they would respond to this question, which they had been told in advanced:

“Secretary of Labor Hilda Solis recently commented that the healthcare sector continues to be a bright spot for job creation. How is the nation to reconcile the desire for “job creation” with the desire for cost containment?”

First, some background. Secretary Solis is correct – the healthcare sector is a jobs engine. In just the past year, healthcare has added about 325,000 jobs, accounting for perhaps a third of total U.S. job growth. By way of perspective, the rapidly growing energy sector creates about 100,000 jobs annually. Job growth is great, but more jobs in health care means more spending on health care. Despite the technological imperative that propels the system, healthcare remains a labor intensive business. Half or more of hospital spending goes to labor, not including physician expenses. Labor expenses dominate home health and long term care. It is nigh on impossible to reduce healthcare spending without reducing labor spending. Thus, job creation and cost containment are enemies.

I put the ball in the hands of the panelists: do you favor job growth or do you favor spending cuts? The panel punted.

All four panelists invoked the“efficiency mantra.” You know what I am talking about: “It is our responsibility to find ways to make healthcare more efficient.” The efficiency mantra is always followed by the “we are making a difference incantation”: You know this one too: “Skeptics will tell you that it cannot be done, but we are committed to this and we are already making a difference.” Then they throw out the “mystery statistic”: “We are saving millions of dollars while simultaneously improving quality.” What is the mystery? If every hospital is saving millions of dollars, then why does healthcare spending continue to increase?

Let’s take the CEOs’ at their word. Suppose that their hospitals are saving money by preventing unnecessary hospitalizations and eliminating unnecessary tests and procedures. Suppose further that they are keeping their local communities healthier through prevention, early detection and early treatment. I am all for it. After a century of unabated growth, the healthcare system would finally shrink. Hospitals could downsize. Outpatient surgery centers would go wanting for patients. Demand for long term care would finally trend down. And the nurses, technicians, aides, and all the others who staff these facilities would be looking for new jobs.

I haven’t mentioned the booming business in healthcare facilities construction. Right in my backyard, Rush University Medical Center just built a $673 million facility. Children’s Memorial is building a new hospital in downtown Chicago to a tune of nearly a billion dollars. That pays for a lot of tradesmen. Slow down health spending and the wherewithal to build these magnificent facilities dries up.

So the CEOs really did avoid the central question. (One CEO offered that we could save money by replacing high wage labor with lower wage labor. Fortunately, Crain’s Business Breakfasts do not attract many union activists.) What could they have said, besides the usual platitudes? If I had the rare talents required to be a hospital CEO and the moderator laid this trap for me, here is how I would have responded:

“I do not see any inconsistency. Yes, healthcare spending is high and we need to eliminate waste. But on average you get more for your healthcare dollar than on anything else you can buy. There is no greater gift than the gift of health, and our hospital teams help people live longer, healthier lives. As we move forward, we will continue to eliminate inefficiencies but we must also be responsive to the needs of an aging population. We will continue to promote wellness and prevention, but we must also be prepared to take advantage of medical breakthroughs that will allow us to better cope with cancer, heart disease, and the many other afflictions that we must all eventually face. The question should not be whether we are spending too much or too little on healthcare, but whether we are spending our money wisely. If we are – and I believe we are making major strides in that direction – then we will have the appropriate labor force to meet our community’s needs. An efficient healthcare system that grows in response to community needs – that is my vision, and it is one that generates jobs without wasting dollars.”

Okay, so I have thrown in a few platitudes of my own. But the fundamental tradeoffs are there for all to see. Even if you strip away all the inefficiencies, healthcare is still expensive and becoming more so. But we get so much for our health dollars that we have to be careful in our zeal to cut spending not to throw out the baby with the bath water. If and when our providers can make the case that they are serious about efficiency, no one would begrudge their growth.

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