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Hospitals' impact less than reported

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After years of screaming by employers that spiraling health care spending is crimping their profits and forcing them to hold down wages, an economic impact study released last week by Indiana University Health suggests health care spending is an unmitigated blessing to the Indiana economy.

But the amount of money that IU Health actually adds to the Indiana economy is about half as large as the number cited in the study, according to IBJ's analysis of IU Health's financial data.

The economic impact study, conducted by Pittsburgh-based consulting firm Tripp Umbach, says IU Health’s spending pumps $3.6 billion into the Indiana economy every year. As that money swirls around the state, it bumps the total economic contribution up to $6.6 billion.

Add in the Indiana University School of Medicine—which supplies the physicians for key IU Health hospitals—and the total impact is $7.5 billion, according to Tripp Umbach, which has performed similar studies for numerous hospital systems and academic medical centers over the past two decades.

Those figures are based on IU Health’s annual expenditures (about $4 billion) minus money that “leaks” out of the Indiana economy. But Tripp Umbach did not account for the fact that the majority of IU Health’s funding comes from Hoosiers, their employers or the state government.

Spending by Hoosiers on health care is a lot like their spending at grocery stores and gas stations—vital for residents to be able to work, but not necessarily a boon to the state economy since most of the money would have been spent here, anyway.

By contrast, when Eli Lilly and Co. sells medicines all over the country and brings the profits back to Indianapolis, it is putting new money in the Indiana pot.

IU Health does add to Indiana’s economy in two key ways: when it attracts patients and visitors from outside Indiana and also when it receives federal payments from the Medicare and Medicaid programs.

In 2010, IU Health received one quarter of its patient revenue, or $1 billion, from the federal Medicare program, according to its audited financial statements.

Medicaid, the state-federal program for low-income patients, accounted for 7 percent of IU Health’s patient revenue. The federal government pays 73.5 percent of all Medicaid payments in Indiana, so IU Health pulled in another $209 million from the feds.

Also in 2010, IU Health recorded a special $169 million payment from Medicaid because it serves a “disproportionate share” of low-income patients. All that was federal money.

The IU medical school spends $240 million a year on research, most of which is funded by competitive grants from the federal government, charitable foundations or via corporate contracts.

So that’s $1.6 billion in outside money IU Health brings into the state.

IU Health draws 1.2 percent of its patients from outside Indiana. Those patients tend to come for expensive procedures, such as lengthy stays at Riley Hospital for Children or brain surgery at Methodist Hospital. They also often come with non-patient family members. Tripp Umbach estimates those two groups spend nearly $60 million per year on care or visiting expenses.

Finally, IU Health and the medical school are also visited by out-of-state professionals or help to host medical conferences, bringing in numerous visitors each year. Tripp Umbach estimates that generates $210 million a year in spending.

That means IU Health brings a total of $1.8 billion to Indiana every year from out of state. And using the same multiplier Tripp Umbach did puts IU Health’s total economic impact at $3.4 billion.

That’s a huge contribution, but it’s a little more than half the $6.6 billion Tripp Umbach claimed.

Paul Umbach, founder and president of Tripp Umbach, said his firm's analysis was conducted using a “conservative, fresh dollar approach” and that it uses standard methods for economic impact studies. Indeed, Tripp Umbach conducts an annual study for the Association of American Medical Colleges to quantify and rank the economic impacts of the largest U.S. academic medical centers. IU and IU Health ranked No. 20 in its most recent study.

“It does have an impact. These are real jobs,” said Umbach, noting that IU Health employs 27,000 workers around Indiana, paying average wages of $55,000 per year. Also, the IU medical school produces more than 300 new doctors each year, most of whom remain in Indiana. Tripp Umbach has done other studies that estimate that each new doctor has an economic impact of $1.3 million per year.

Umbach also praised IU Health for doing a better job than most academic medical centers at spending its dollars inside its home state. “It has a way, way more profound impact than one of the academic medical centers in, say, New York," he said.

Still, it’s important to remember that most of that impact first came out of Hoosiers’ pockets.

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  • Shortage of Physicians
    A more fundamental economic impact question that should be posed to IU and our State is the broader healthcare question i.e. Physician shortage. It is no secret that our State does not have enough physicians. Even with the Marian University DO medical school, we will not have enough physicians. With the health care changes that are being proposed and implemented in some form, I am afraid that the shortage will become worse and be a significant economic drain on the the State resources. As a State, we have to get beyond the IU Health mystique, and more fundamentally and rationally work towards solving our health care challenges. As I have stated before, this can begin with at least two additional medical schools (Purdue and Notre Dame). Purdue, for example, already has a strong foundation, a satellite site for the first two years of medical school for IU, pharmacy school, nursing school. pharmacology department. bioengeneering department, several hospitals in the Lafayette area, etc. With this foundation, it would not take a huge investment by the State to provide the additonal support for medical training for the last two clinical years. We need forward thinking legislators and entreprenuers to have visions beyond our current broken medical education system.
  • The EMPORER STILL HAS NO CLOTHES
    The article does not tell the whole story regarding the economic impact of the IU School of Medicine. Back in the fall The American Association of Medical Colleges (IU is a member)published a report (https://www.aamc.org/download/265994/data/tripp-umbach-research.pdf) of the economic impact of publicly funded research. Our State did not even get mentioned. It was so far down on the list. This study was conducted by the same Tripp Umbach group. I realize that publicly funded research is only one source of economic impact. However, it should add to our skepticism. The healthcare in our State needs greater diversity, specifically more medical schools with an emphasis on research and healthcare delivery. Purdue and Notre Dame would be two obvious place for medical schools. As a State, we have to stop thinking ourselves as a "one horse town." I realize that their are other health care systems in our State, Community, Ascension, St. Francis, etc. However, a big source of the physicians in our State are home growth at IU. The additional the medical schools would be a huge economic boost to the State.

    Our neighbors, Ohio(6 medical schools), Illinois (7 medical schools), Michigan (3 medical schools) were all listed in the top 12 states for total economic impact. Indiana was not even listed in the top 25. The amount of economic impact for those states were listed in the billions of dollars. The reality is our state is far behind. One important step forward would be have more medical schools. Both Notre Dame and Purdue could easily support a research medical school. It is time for our state to develop the appropriate infrastructure for growth in the biotechnology/life sciences fields.
    • Response to Kelly
      Kelly,

      I am not an economist, but I do talk extensively to economists and read their published journal articles. Among economists, it is a fundamental principle that the economic impact of a service business (like a hospital) is based on how much money it brings in from OUTSIDE the economy in which it operates. Spending from INSIDE a hospital's home economy is just that, spending, and is not income to the economy. Hospitals can be great assets to local economies if they bring in patients from neighboring communities. But since IU Health is trying to measure its STATEWIDE impact, it can really take credit for only the amount of money it pulls in from outside of Indiana. To count all its SPENDING as INCOME is really to take credit for income generated by other businesses, and then spent on health care at the hospital. The Illinois study you reference also fails to make this distinction. I hope this is helpful, at least to understand why I wrote my story the way I did.

      J.K. Wall
    • Excessive advertising
      It is obvious that IU has plenty of money to spend on print and TV advertising.
    • Formula question
      I am curious about the formula you used to deduce that the study was incorrect. It doesn't seem to be correct. Are you an economist or a journalist? Many hospitals use this same method for deriving their impact on a state (ie) http://www.marketwatch.com/story/illinois-hospitals-generate-787-billion-annual-impact-on-states-economy-2012-02-20. Not to mention the jobs that are kept in Indiana due to the hospital operations.

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