THCB

Hobson’s Choice

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 advance:

“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.

David Dranove, PhD, is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red.” This post first appeared at Code Red.

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8 replies »

  1. Cure is a four letter word. And when it comes to most health care interventions, it is not about “curing” illness, it is about controlling it and getting disease or disorder into remission, once pathology has raised it’s ugly head, it will not cease and desist forever. Prevention is a wonder and laudable goal, but, change is not an easy process, just look to those who allegedly represent us at a government level as example A.

    So many people just refuse to entertain the premise I have been repeated here since day one of my arrival, take profit agendas out of health care and you will see some semblance of cost control settle in. As long as people tolerate individuals making excess money at the sake of providing care, it will only continue to attract the nefarious elements that pervade in business models. You look back to where health care drove into the septic tank of callousness and irresponsibility, it was when profit motives were allowed in.

    So, the usual suspects will probably again weigh in how this comment is absurd and unapplicable. Because agendas and ulterior motives have to be maintained, like, the behaviors of addicts, right?

    Happy freakin’ holidays, 2012 will be so much better should more PPACA principles take hold, eh, Americans!?

  2. “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.”

    Wow. I read this comment over several times to make sure I was reading it correctly. We get less for our healthcare expenditures than virtually any other nation.

    Would love to know where you are coming from on this.

  3. I agree, but the Hobson’s Choice of “do you favor spending cuts or do you favor job growth” does not exist in any industry. Your suggestions for community based treatment could be a job creator and improve efficiency.

    It’s not a free market, but it is a market. It’s always a market, much to the Soviet Union’s chagrin. Semantics, really.

  4. According to Prof. Michael Spence, 98% of the new jobs created in America over the past 20 years have been in health care, government, education, hospitality, retail, and food service.

    Why? Because these areas are largely immune to outsourcing and foreign competition. Medical tourism is making a slight dent in hospital employment, but very slight indeed.

    It is very difficult to tease out the question of whether health care is holding down the US economy due to insurance costs, or is health care propping up the economy by creating good jobs.

    I sometimes see health care as an economic World War II for the US economy — if it had not existed, we would have had to invent it just for the economic stimulus.

    If General Motors were to cut its health care bill by $1 billion, a certain number of doctors and nurses and techs in Michigan would be unemployed. However, they would not get jobs at GM, and they would not be able to buy new GM cars. The $1 billion reduction for GM in health insurance might be
    matched by a $1 billion reduction in revenue. All those late-model cars that you see today in medical employee parking lots are both a cost and a benefit to America.

    Nationally, a real reduction in health spending could create a monstrous recession. Now this may be a risk we have to take in the long run. The end of World War II in 1946 was also supposed to create a monstrous recession also,, and obviously it never did.

    Not knowing the big answer, I can at least offer a small answer. I believe in national insurance systems because they spread the burden of health costs. The more money you make, both under and over age 65, the more you pay into Medicare.

    Bpb Hertz, The Health Care Crusade

  5. Yep. Demand is fueled and supply is pinched from both sides.
    The insured want everything coming to them, more if possible.
    And the uninsured need more because they are not being cared for.

  6. It is still supply and demand. Right now the demand is climbing like a homesick angel.

  7. One more time for the record…

    ==> Do not confuse professional compensation with corporate profits (and yes, Virginia, that also includes the so-called not-for-profit outfits called hospitals which are money-laundering hives servicing swarms of for-profit bees).

    ==> Not all “jobs” are the same. Construction and infrastructure jobs continually vanish as the respective projects are completed. Jobs in medicine, however, do no end as long as there is a population needing medical attention.

    Health care costs REALLY DO increase or decrease according to efficiency — not the efficiency of yet another factory-sized medical campus, replete with parking for hundreds of staff and thousands of patients and sales representatives peddling everything from the latest devices and designer drugs to better chemicals to care for the marble floors and industrial-sized laundry. “Efficiency” is gonna have to mean doing preventive and acute care where it is needed, not expecting those who need it most to wait for a visit to the ER.

    Common sense tells me that every dollar spent on a community clinic and a well directed staff of traveling doctors, NPs and CNAs can easily save three or four times that amount upstream which is where patients present only when their conditions get so bad they have no option. Those medical professionals will not, of course, be fishing to see how many designer drugs, stents or pre-cancerous warts they can discover. They should instead be working with the dull, repetitive management of stuff like diabetes, hypertension, pre-natal care and other prophylactic measures that are typically the source for more expensive indigent-care.

    And every time I see a reference to health care as a “market” it makes me want to break out with a stream of profanity not suitable for publication.
    Please, for the sake of one old guy with an idiosyncrasy, please don’t bring up that theme again, at least not in this comment thread. I realize that healthcare IS a market for concierge practices, high-end reconstructive surgery and others (dentistry?) but for the sake of this conversation which is at least fifty-percent about tax dollars, not private dollars, let’s try to speak of health care as the tax-paid public service it really is.

  8. In the macroeconomy, efficiency does not lead to job loss. Imagine that it takes three employees to make an Ipad & three employees to make an Iphone and each costs $500 and the typical American has $500 of income available for Apple products. Each individual can purchase only one or the other product, employing 3 individuals. Now suppose Apple creates a more efficient process that drops the number of employees for each to two, and the cost of each unit to $250. Now individuals can purchase both products, employing four people. But lets say Apple halves their cost of production, but lowers the price by only 40%. Now Apple has additional profits which it can invest in capital expenditures, increased wages & salaries, or increased payments to shareholders.

    Healthcare is a different market, of course. The normal market limits on spending, for instance, aren’t there. And the process described certainly doesn’t play out in every situation. But it is important to note that increased efficiency is by no means incongruent with growing employment or capital investment (i.e. hospital construction).

    Also, you shouldn’t confuse “efficiency” (getting more with less) with “economy” (just spending less). The health system could get much more efficient while spending more. In the three “E’s” of Economy, Efficiency & Effectiveness the last one is the most important, but most people focus on the first. With your hypothetical response, I think you are looking for effectiveness.

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