Evan Soltas
Jun 29, 2013

Health Care Costs Are Jobs

(Originally published here.)

Is health care America's economic savior or scourge? The answer, strangely, might be both.
In the short term, growth within the health-care sector provides a boost to a weak economy. But the same rise will eventually be more trouble than help.

Over the last decade, the health-care industry has added 2.7 million to payrolls. Not only is that more than any single other sector, but the rise of health care explains half of all net job growth over the last decade. Health care has gone from 6.4 percent of the labor force in 1990 to 9.4 percent this month. Had the sector not expanded over that period, the unemployment rate would stand at 10.4 percent today, all else equal.

It also represents a major source of stability and growth in terms of national income: 17 percent of gross domestic product now goes to health care. That spending is insulated from the business cycle. And new research from the Federal Reserve Bank of Cleveland suggests that the health care sector is almost certain to keep growing as America ages.

The Cleveland Fed economists compared the residents' median age of U.S. states and their share of health care employment. They found, naturally, that the older the state, the larger share of jobs in health care -- but what was striking was the magnitude of the effect. For every 5-year increase in the median age, the share of health care employment rises by 2.5 percent.

All this sounds like great news. Americans need jobs and income -- and work in health care is often better-paying, safer and more rewarding than the alternatives. Health-care workers earn 32 percent more per hour than the average private-sector worker and have the economy's lowest rate of fatal occupational injury. And there are few fields in which the social good is served as directly.

Yet, looking further ahead, this good news turns to bad. The reason the American health-care sector is so large is unfortunately not because Americans make uniquely great doctors, or because Americans need so much medicine. It's because the sector is wildly inefficient. As a share of GDP, the United States already spends approximately twice as much as the average developed country. We have neither the health outcomes nor the regular medical attention to justify that expenditure. The inefficiency is expanding. The spending is not doing us much good.

Economists and politicians talk frequently of "reducing health-care costs." There are some ways that costs themselves can be better contained -- for one, Congress could allow Medicare to negotiate drug prices with pharmaceutical companies. Yet the disembodied talk of health-care "costs" is mostly deception.

There is no pot of gold at the end of the rainbow where all of our health-care spending has magically accrued. Health care "costs" are really health care jobs. In surveys, hospital managers name labor as their largest cost issue -- not the Affordable Care Act.

Achieving any substantial reduction in the cost of care will require what economists call "labor-saving technology." We will have to find ways to destroy health care jobs -- or at least to slow their growth. That will require technology. It will also require policy changes that reduce demand for labor-intensive care.

What would that look like? An obvious answer might be electronic health records. But its labor savings have been disappointingly small (though that could change with time and wider implementation). A second might be to shift care into lower-cost labor when possible -- such as treating people in a retail clinic instead of a hospital. That strategy is proving a private-sector success. A third is the Affordable Care Act’s new excise tax on high-end health plans, a public policy that offsets extant subsidies in the tax code. It shows that when government is already part of the problem, changing it must be part of the solution.

While it isn't pretty to think about health care as a "jobs" problem rather than a "cost" problem, it is greatly clarifying. A healthier economy would be with millions fewer health care jobs -- and millions elsewhere.