Economic value of hospitals is not in jobs and revenue

October 7, 2013
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I am neither an economist nor an academic researcher. Most of you reading this aren’t either.

But you don’t have to be to realize that recent reports on the economic impact of hospitals keep asking and answering the wrong question.

The latest of these reports, published last week by BioCrossroads, is a wonderful tabulation of hospital and outpatient center employment and even the net value they add to the economy. It calculates $18.3 billion in direct economic impact by hospitals in terms of wages, taxes and contribution to gross state product.

Most helpfully, the BioCrossroads report, which was conducted by Ohio-based Battelle, breaks down the economic impact of hospitals into 25 regions around the state. [You can find the sub-regional results in the report’s appendix, beginning on page 25.]

These numbers are useful to get a sense of the size and scope of the health care economy in Indiana. But as I’ve written before, this is a tabulation of a bill being paid, not a check being cashed.

Which is not to say that health care does not have huge economic value. It does.

Of course, for a community with few other industries, the jobs at a hospital are a huge economic boom—jobs that are financed to a large extent by the taxes paid by the entire state for Medicare, Medicaid and other public health insurance programs.

And, of course, for a community like Indianapolis, where lots Hoosiers from all over the state come to receive health care services, the sector is a net importer of wealth to the community. This shows up in the BioCrossroads report, which concludes that hospitals and outpatient centers employ nearly 53,000 workers and contribute more than $6.6 billion annually to the local economy.

But the real value of health care is not in the jobs it supports or the revenue it brings in from the state’s residents, employers and taxpayers. I am mystified, frankly, why the industry keeps trying to prove its worth in those terms.

The real value of health care, pure and simple, is that it extends our productive lives. And that has a huge economic impact.

So it’s too bad neither the BioCrossroads study, nor this one, nor this one, even attempt to measure the life-extending value of health care.

I haven’t measured it either, but I can see it every time I get together with my dad. Now 66, my dad is making more money than at any time in his career and having more fun than ever doing so. He intends to keep working, Lord willing, until he’s 70.

He is only able to do so because, 12 years ago, he had a quadruple bypass surgery and since then has had two other stent procedures to prop open his arteries. His cardiologists are still on him about exercise and sticking to his meds, but he’s at least healthy enough to work and exercise.

Contrast my dad with his dad. When my grandfather was 66, he was staying at my parents’ house because, not only could he not work, he couldn’t even take care of himself. He was winded by any short walk. He later had to use a wheel chair and finally, because of advanced diabetes, had one of his legs amputated. He died in our home, due to cancer, at age 69.

That’s the real economic value of health care. Decades of technological advances, as well as better drugs, public health improvements and a general rise in health-consciousness in society—all of which can be credited to some degree to hospitals and doctors—have improved greatly since my grandfather's day. To the extent my father has taken advantage of those improvements, he has been able to keeping turning his time into wealth for himself and the state of Indiana, whereas his father, at the same age, had ceased contributing to the state economy.

Health economists do calculate the value of extra, high-quality years of life. For example, this presentation by Harvard University economist David Cutler shows that advances in cardiac care (such as those my father enjoyed) can be credited with extending patients’ lives by 3 years.

If each year is worth about $100,000—and that’s roughly what I think my dad is making these days—then the value of those years is $300,000. Yet the average amount of money spent on cardiac care after age 45 is $30,000 in net present value, according to Cutler.

Now that’s value added—and if applied just to Indiana, it would dwarf the $9.6 billion that BioCrossroads attributes to the state’s hospitals and outpatient centers.

I encourage the state’s hospitals or universities or BioCrossroads to commission a study that tries to quantify the number of years added to Hoosiers’ working lives because of the work of Indiana’s hospitals and doctors. I’m sure the numbers would be huge—and would do far more than these recent studies to make Indiana’s high-priced hospitals look like a good investment.

  • Well put
    Thoughtful writing as always JK, it is interesting that something so obvious isn't promoted, but I suppose that the employement stats are more readily wishes on your father staying healthy by the way...PS, his physicians are right about diet and exercise, so encourage him in that area...
    • public health
      Another part of the reason this report doesn't focus upon this type of metric - is if you start to place value on life expectancy & quality of life, then approaches that do not necessarily benefit the current cost centers of the health care system come to the forefront, like primary care and public health departments (Indiana's is one of the most underfunded in the country). Health insurance is also critical to achieving these metrics.
    • Another point of view
      I completely disagree with your theory in this matter. I believe that by extending people's lives we have created a huge financial drain on our society via taxation to support Medicare and Social Security payments decades longer than originally planned for. I believe the small percent of our population that is still working and paying taxes cannot support the hefty bills to support the retired people that no longer contribute financially to our economy, but drain these funds for far too many years. This is why the government is looking for ways to reduce or potentially eliminate these programs for future generations. These programs have been, and continue to be, gutted by the people that have been collecting far more than they ever contributed for far too long.
      • Understand your concern, John
        Hear your valid concern, John, but wondering if you would feel differently if the retirement age was increased to match the extended higher quality of life period, say to 70, as some have suggested needs to happen for fiscal reasons. Would that alleviate your concern regarding cost vs benefit?
      • To Jim
        Thanks for the well wishes for my dad. I will keep encouraging him.
      • Another point of view
        John, so you would prefer we not have great health care that extends life? And Social Security would be solvent if Washington had not drained it so many times for other spending like war and funding other countries. So give me good health care any day. And yes I am still working at 69.
      • Sarah and Louise
        Yes Sarah, the retirement age does need to be raised again. The change that allowed people to start collecting at age 62 should never have existed and also needs to be stopped immediately. Louise, at 69 are you also collecting social security? And do you need it to make ends meet or are you collecting it because you have the "right" to? Our problem is that we have allowed too many people to retire and collect social security for 30 or more years, which was never intended and we have not funded for. Medicare has been raided for the same reason. Not to mention that the pharmaceutical companies managed to get Part D passed so their pockets could be enriched even more at the taxpayers' expense.

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