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What's Really Propping Up The Economy


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If you really want to understand what makes the U.S. economy tick these days, don't go to Silicon Valley, Wall Street, or Washington. Just take a short trip to your local hospital. Park where you don't block the ambulances, and watch the unending flow of doctors, nurses, technicians, and support personnel. You'll have a front-row seat at the health-care economy.

For years, everyone from politicians on both sides of the aisle to corporate execs to your Aunt Tilly have justifiably bemoaned American health care -- the out-of-control costs, the vast inefficiencies, the lack of access, and the often inexplicable blunders.

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But the very real problems with the health-care system mask a simple fact: Without it the nation's labor market would be in a deep coma. Since 2001, 1.7 million new jobs have been added in the health-care sector, which includes related industries such as pharmaceuticals and health insurance. Meanwhile, the number of private-sector jobs outside of health care is no higher than it was five years ago.

Sure, housing has been a bonanza for homebuilders, real estate agents, and mortgage brokers. Together they have added more than 900,000 jobs since 2001. But the pressures of globalization and new technology have wreaked havoc on the rest of the labor market: Factories are still closing, retailers are shrinking, and the finance and insurance sector, outside of real estate lending and health insurers, has generated few additional jobs.

Perhaps most surprising, information technology, the great electronic promise of the 1990s, has turned into one of the biggest job-growth disappointments of all time. Despite the splashy success of companies such as Google (GOOG) and Yahoo! (YHOO), businesses at the core of the information economy -- software, semiconductors, telecom, and the whole gamut of Web companies -- have lost more than 1.1 million jobs in the past five years. Those businesses employ fewer Americans today than they did in 1998, when the Internet frenzy kicked into high gear.

ATTITUDE SHIFT

Meanwhile, hospitaL administrators like Steven Altschuler, president of Children's Hospital of Philadelphia, are on a hiring spree. Altschuler has added the equivalent of 4,000 new full-time jobs since he took over six years ago, almost doubling the hospital's workforce. To put this in perspective, all the nonhealth-care businesses in the Philadelphia area combined added virtually no jobs over the same stretch.

Altschuler plans to add 3,000 more employees over the next five years as the hospital, one of the nation's leading pediatric centers, spends $1.7 billion to expand. Next up is a new 1.2 million-square-foot research facility that will be packed with well-paid scientists and support staff. "Health care is the major engine for the economy of the city of Philadelphia," says Altschuler.

The City of Brotherly Love is hardly alone. Across the country, state and local politicians, desperate for growth, are crafting their economic development strategies around biotech and health care. California will pour $3 billion into stem cell research over the next 10 years, and other areas are on the same path. "Our downtown business leaders and politicians have traditionally considered health care as a cost center, not as an economic engine," says Baiju R. Shah, a former McKinsey & Co. consultant who runs Cleveland's BioEnterprise, a nonprofit founded four years ago to stimulate the local health-care and bioscience industries. "But people are waking up."

What they're waking up to is the true underpinnings of the much vaunted American job machine. The U.S. unemployment rate is 4.7%, compared with 8.2% and 8.9%, respectively, in Germany and France. But the health-care systems of those two countries added very few jobs from 1997 to 2004, according to new data from the Organization for Economic Cooperation & Development, while U.S. hospitals and physician offices never stopped growing. Take away health-care hiring in the U.S., and quicker than you can say cardiac bypass, the U.S. unemployment rate would be 1 to 2 percentage points higher.

Almost invisibly, health care has become the main American job program for the 21st century, replacing, at least for the moment, all the other industries that are vanishing from the landscape. With more than $2 trillion in spending -- half public, half private -- health care is propping up local job markets in the Northeast, Midwest, and South, the regions hit hardest by globalization and the collapse of manufacturing (map).

Health care is highly labor intensive, so most of that $2 trillion ends up in the pockets of workers. And at least so far, there's little leakage abroad in terms of patient care. "Health care is all home-produced," says Princeton University economist and health-care expert Uwe Reinhardt. The good news is that if the housing market falls into a deep swoon, health care could provide enough new jobs to prevent a wider recession. In August, health-services employment rose by 35,000, double the increase in construction and far outstripping any other sector.

John Maynard Keynes would nod approvingly if he were alive. Seventy years ago, the elegant British economist proposed that in tough times the government could and should spend large sums of money to create jobs and stimulate growth. His theories are out of fashion, but substitute "health care" for "government," and that's exactly what is happening today.

Make no mistake, though: The U.S. could eventually pay a big economic price for all these jobs. Ballooning government spending on health care is a major reason why Washington is running an enormous budget deficit, since federal outlays for health care totaled more than $600 billion in 2005, or roughly one quarter of the whole federal budget. Rising prices for medical care are making it harder for the average American to afford health insurance, leaving 47 million uninsured.

Moreover, as the high cost of health care lowers the competitiveness of U.S. corporations, it may accelerate the outflow of jobs in a self-reinforcing cycle. In fact, one explanation for the huge U.S. trade deficit is that the country is borrowing from overseas to fund creation of health-care jobs.

There's another enormous long-term problem: If current trends continue, 30% to 40% of all new jobs created over the next 25 years will be in health care. That sort of lopsided job creation is not the blueprint for a well-functioning economy. One solution would be to make health care less labor-intensive by investing a lot more in information technology. "Low productivity in health is mostly a product of low investment," says Harvard University economist Dale Jorgenson.

For now, though, health-care hiring is providing a safety net in areas where manufacturing and retailing are no longer dependable sources of jobs. Take Johnstown, Pa., a town that once hummed with activity from local steel mills, coal mines, and nearby factories. As most of these businesses closed, the town emptied out, going from a population of 63,000 in 1950 to 23,000 today.

Now, Conemaugh Health System, with about 5,000 workers, is the biggest employer in town. "Everyone has a Conemaugh parking sticker on their car," says Linda D. Suter, 48, who's in her second year at the nursing school Conemaugh operates. Suter's dad worked at a factory in a nearby town, now closed, that made backyard swing sets for kids.

Frank Kosnowsky sold appliances at the Sears (SHLD) in Johnstown for 10 years, starting right out of high school. But he got fed up with the way the company was changing and started thinking about going to nursing school. "One day I had a disagreement with my boss, and the application went right in," says Kosnowsky, 29. "I wanted something that had a future." He worked part-time at Sears while he went to nursing school. Now, three years later, he's the first and only male nurse working at Conemaugh's neonatal intensive-care unit -- a career far different than that of his coal miner dad.

Suter and Kosnowsky live smack in the middle of the "Health Belt" that stretches from New England down through New York and Pennsylvania, across the Midwest and down through most of the South. These are areas where health care has been the major source of job growth over the past five years.

Nowhere is that truer than in Cleveland. There, Cleveland Clinic, with 29,000 employees, is the biggest employer by far. Next-largest is another hospital system, University Hospitals Health System, with 21,600 staffers. Then comes insurer Progressive Corp. (PGR) and KeyCorp., each with fewer than 10,000 workers in the area. Cleveland Clinic's performance is pretty good for an outfit that started in 1921 with four docs in a building they planned to turn into a hotel if their vision didn't pay off.

Beyond its immediate employment tallies, the Clinic has a huge multiplier effect on the local economy. CEO Dr. Delos M. Cosgrove says it supports perhaps 75,000 jobs in all in the area, ranging from Clinic staffers to workers at hotels and restaurants -- which patients and their families use in more than 2.9 million patient visits per year -- to 3,000 suppliers to the Clinic.

Only a few years ago manufacturers were Cleveland's job engines. Companies such as machine-tool giant Warner & Swasey Co. don't even exist anymore. Conglomerate TRW was sold in 2002, and parts of it moved away. Fittingly, the Clinic now occupies its former headquarters, which TRW donated.

Health care has been one of the few economic bright spots in the Detroit area, too. Nancy M. Schlichting heads the sprawling Henry Ford Health System, founded by the great man himself in 1915. Schlichting is overseeing the construction of a new 300-bed hospital in West Bloomfield, Mich., a suburb of Detroit, which will eventually generate the equivalent of 1,200 full-time jobs. This expansion comes at a time when Ford Motor Co. (F) is considering big layoffs.

Then there's North Carolina. Since 2001 it has seen a total job increase of 24,000, or 0.6%. Meager enough -- but take out the 60,000 jobs added by health care, and the state's jobs would have decreased by 36,000. Employment in manufacturing, retailing, trucking, utilities, and information all fell. And construction added only 5,000 jobs, a mere fraction of health care's contribution.

Oddly enough, the retirement meccas of Florida and Arizona are among the least dependent on health-care jobs for growth. Over the past five years the two states have gotten only 10% and 15%, respectively, of their new jobs from health-care services -- hospitals, doctor's offices, and nursing homes. Phoenix showed a job gain of 240,000, but only 30,000 were in health care. That's partly because the influx of elderly has been balanced by a rise in younger workers, too.

Is the health-care economy a good deal for workers? It is for Patricia A. McDonald, a second-year student nurse at Conemaugh. Before going to nursing school, McDonald, 46, sold insurance door-to-door, often driving close to 1,000 miles a week in rural areas to make cold calls. Her take in sales commissions was $35,000 to $40,000 a year, but that was before deducting expenses. Registered nurses in the Johnstown area, by comparison, are paid an average of almost $43,000 -- with no traveling. "This will be much better," says McDonald.

Unlike many other industries, health care offers a full range of jobs, from home health aides making very low wages through technicians and nurses making middle-class salaries up to well-paid doctors. On average, annual pay in private health services is $43,700, slightly above the private-sector average of $42,600.

RIPPLE EFFECT

Even more promising, health care has taken over the role manufacturing used to play in providing opportunities for less skilled workers to move up. Jeffrey Lites started as a part-time cashier in the cafeteria at Philadelphia's Children's Hospital in 1996 after being laid off as a computer operator. "I never envisioned working in a hospital," say Lites. But now, close to finishing his degree in early childhood education from Temple University, Lites works as a child-life assistant, providing recreation and activities for young patients who may stay for weeks or even months. "I have the best job in the entire hospital," says Lites, who moonlights as a musician on weekends.

The expansion of health care is also spinning off related jobs. Cleveland Clinic Innovations, a unit that funds startups, has already created 19 companies in its five years of existence. Together they employ about 186 people, including more than 50 in the Cleveland area. One, Cleveland BioLabs Inc. (CBLI), went public in July and trades on NASDAQ. "We like to say that the New Economy is alive and well in the 40 blocks of the Cleveland Clinic," says Christopher Coburn, executive director of Cleveland Clinic Innovations.

James A. Martin is pursuing the same pot of gold in Shawnee, Kan., a city of almost 60,000 located just outside Kansas City. Martin, executive director of the Shawnee Economic Development Council, is helping the city set up a biosciences development district, the first in the state. He's hoping to build on the jobs already there, including the animal-health division of Bayer HealthCare (BAY). "The high growth potential of biosciences jumped out at us," says Martin. "We got the bug."

Scott Becker, CEO of Conemaugh, is leading the effort to develop a technology park in a prime location in the center of Johnstown, where a mammoth dairy used to be. Potential biotech and info tech tenants include a company dealing with electronic medical records and another that's involved with drug trials. "The goal is to bring a new, younger workforce back to town," says Becker.

UNBALANCED

Shah of Cleveland's BioEnterprise cautions that biotech may not be the right economic development strategy for many places. For one, it's hard to develop a local biotech industry from scratch. "I've seen a lot of regions that take a swing at that," says Shah. Besides, he says, biotech mainly provides jobs for a small number of highly paid workers. For many communities, Shah favors a broader strategy of encouraging health-care delivery and medical equipment and supplies.

Still, using health-care spending to create the vast majority of new jobs, while beneficial in the short run, is not desirable over the long run. A well-balanced economy needs to provide a wide variety of jobs, not just positions for doctors, nurses, and medical technicians.

The biggest worry is that demand for health care will absorb too much of the workforce and squeeze out other types of jobs. If medical spending rises to 25% of gross domestic product by 2030, as many economists expect, health care's share of jobs could grow to 15% or 16% of the labor market from today's 12%, based on historical patterns.

Such a shift in employment would require health care to be the single biggest creator of jobs in the economy for the foreseeable future. And while the U.S. could in theory afford to spend 25% of GDP on health care, it's hard to imagine a world in which our children have to choose between working for the local hospital or the local health insurer.

The real question, then, is whether it is possible to restructure the health-care system to provide equally good care with fewer workers. The answer is yes, say some experts. "What we have consistently found is that the supply of physicians, except at the low end, has rather little influence on patient outcomes," says David Goodman, a professor at Dartmouth Medical School who started his career as a pediatrician in a rural county in Northern New Hampshire. Jonathan Weiner, a professor at Johns Hopkins University's Bloomberg School of Public Health, agrees: "I am absolutely certain that we can provide quality health care with fewer doctors."

These assertions miss the point, says Richard Cooper, a professor at the University of Pennsylvania School of Medicine. Cooper, a former dean at the Medical College of Wisconsin, argues that the health-care workforce grows along with real incomes and GDP. "When you get richer, you aren't going to triple your food expenditures," says Cooper. "But there's much more that can be done to improve health." Princeton economist Reinhardt concurs, noting that "if you did geriatric health properly, you'd need a lot more geriatricians."

But both sides can agree that more spending on information technology could reduce the need for so many health-care workers. It's a truism in economics that investment boosts productivity, and the U.S. lags behind other countries in this area. One reason: "Every other country has the payers paying for IT," says Johns Hopkins' Gerard Anderson, an expert on the economics of health care. "In the U.S. we're asking the providers to pay for IT" -- and they're not the ones who benefit.

Breakthroughs in technology offer other enticing possibilities for making health care less labor-intensive over the long run. Hakon Hakonarson just moved from Iceland to start up the new Center for Applied Genomics at Children's Hospital of Philadelphia. Hakonarson's group is using cutting-edge automated technology to analyze hundreds of DNA samples from hospital patients and their parents per day, something that wasn't possible until recently. His aim is to collect enough data within a short period of time to understand the genetic causes of childhood diseases and determine which children will respond best to which drugs. "If we go at this pace," says Hakonarson, "we will have something very powerful to analyze before yearend." The eventual result could be better, cheaper treatments, with fewer expensive side effects.

Meanwhile, Hakonarson employs 10 people in his lab as well as five nurses and medical assistants in the field who do nothing but ask families to participate in the study. For now, the health-care economy marches on.

By Michael Mandel, with Joseph Weber in Chicago


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