Anticipation and anxiety in our health care economy

When the Greater Boston Chamber of Commerce installed Dr. James Mongan, president and chief executive of Partners HealthCare, as chairman of the board in May, the symbolism did not go unremarked. “Much of the future in terms of economic policy within our region is going to come from the life sciences sector,” chamber president Paul Guzzi told The Boston Globe.”Health care as an industry intersects with every business in the Commonwealth,” commented consultant Ellen Lutch Bender in the Boston Herald. All true–and all the more reason to ponder the impact of the health care sector on the Bay State economy, which is prodigious, but mixed.

In Massachusetts, the health care industry is both an economic engine and a financial drain. It is an industry we rely on today for jobs and economic stimulus and one for which we have even higher hopes in the future. But it’s also one whose rising costs, which seem to know no bounds, come largely at the expense of other segments of the economy.

The health care industry is both an engine and a drain.

Health care is a major industry in Massachusetts, and its institutions loom even larger on the local level. Massachusetts General Hospital is the largest private employer in the city of Boston, and the Partners system it’s part of is the largest private employer in the state, with a payroll of 30,000 people. UMass Memorial is the largest private employer in Worcester, as is Bay State Medical Center in Springfield. A total of 136,300 workers labor in Massachusetts hospitals, the seventh densest concentration of hospital employment per capita in the 50 states.

That’s just for starters. According to a 2003 study of the economic contributions of the industry, prepared by the Milken Institute for the New England Healthcare Institute, the health care sector overall employed a total of 393,000 people in the Bay State in 2001, enough to tie with Rhode Island as the second-densest concentration of health care jobs in the country. Then there are all the jobs in supplier industries (168,000), and the jobs created when all those employees spend their money in the local economy (288,000)–nearly 850,000 jobs, all told, for a total economic impact of $60 billion. Among metropolitan areas, the Greater Boston area (which reaches up to southern New Hampshire) had the highest concentration of health employment in the country, ranking in the top 10 in nearly every occupational category.

Health care employment is not expanding as rapidly here as it is in some parts of the country, if only because the Massachusetts population is growing so slowly. But employment is still growing steadily, in bad times as well as good. From January 2001 to January 2004, a period spanning the recent recession, health-services jobs grew 6 percent, and hospital jobs 12 percent, compared with a decline of 7 percent in non-health jobs–sufficient for the Massachusetts Hospital Association to cite the health care industry as a “stabilizing force in economic downturns.” Even during the consolidation of the hospital industry in the 1990s, when the supply of acute-care beds fell from 22,000 to 16,000 statewide, hospital employment rose by 4.1 percent, according to the Milken Institute.

But this bounty in jobs and revenue comes at a price to the rest of the Massachusetts economy. In a 2002 report, the Massachusetts Business Roundtable noted that medical plans in Massachusetts were among the most expensive in the United States and their costs were rising by 12 percent that year. “Accelerating inflation on a higher-than-average cost base leaves Massachusetts employers and providers at a competitive disadvantage when compared with other regions in the country,” the business group declared.

Last year, the Massachusetts Taxpayers Foundation cited the return of high annual premium increases, following a period of moderate increase in the late 1990s, in its report–published in partnership with Associated Industries of Massachusetts and the Greater Boston Chamber of Commerce–on the high cost of doing business in Massachusetts. Although that report found the differential between Massachusetts health-insurance costs and those in other states to be narrowing, family plan premiums here were still 8.4 percent above the national average in 2000, third highest of the 40 states reporting individually, and higher than all seven high-technology states used for comparison. In 2001, the average family-plan premium rose 15.4 percent in Massachusetts, to more than $8,400 a year, versus 12.7 percent nationwide; single-plan coverage jumped 18.8 percent, to $3,500, compared to 15.5 percent across the country.

If we have managed to constrain the increase in health costs at all in recent years, it is by putting the system of care under strain. Even as spending careens out of control, the industry reminds us that in Massachusetts alone, of the 50 states, hospitals are paid less than the cost of service by all three major payers–Medicare, Medicaid, and private insurers. Lately, cost control has been accomplished mostly by fiat and hard bargaining, not by innovation in care delivery or management. In the Balanced Budget Act, Congress simply declared that Medicare would pay less, while Medicaid’s habitual underpayment for services has only worsened, with reimbursement rates falling from 85 percent of provider cost in 1985 to 71 percent in 2000; private payers got savings by means of discounts for hospital and other services demanded and obtained by major insurers. Nursing homes–those that have not yet shut their doors–teeter on the edge of bankruptcy even as the largest population cohort in history ages toward eventual infirmity. Meanwhile, the Massachusetts Medical Society’s annual survey reveals a steady deterioration in physician satisfaction. Even as we seem to pay too much for health care, there is reason to believe we are not paying enough.

The politics of our life-sciences future are getting complicated.

If the emerging “life sciences” sector makes good on its presumed business, as well as human, promise, this tension between hopes for growth and fear of its consequences will only get worse. The Milken Institute reports that Massachusetts dominates the medical “innovation pipeline,” with the highest number of biotech drugs granted FDA approval per capita in the nation, and ranks with Connecticut for the highest concentration of medical-device approvals. The Massachusetts Biotechnology Council estimates that Massachusetts-based companies account for 8 percent of the world’s pharmaceutical pipeline. Based on brave projections of how many “downstream” manufacturing jobs could be retained in the Bay State, the biotech trade group claims that this still-young industry could produce more than 100,000 additional jobs by 2010. That’s a big payoff to the Massachusetts economy, but with those innovations likely to yield the most expensive additions to the health care menu yet, that bonanza will come at a high price.

The politics of the Bay State’s life-sciences future are already getting more complicated. With the Massachusetts biotech industry entering adolescence, it is attracting the attentions of major pharmaceutical manufacturers, with drug giants like Abbott, AstraZeneca, Merck, and Pfizer establishing research facilities here, and Novartis locating its global research headquarters in Cambridge; some firms, like Wyeth in Andover, have even used the acquisition of biotech start-ups (in this case, Genetics Institute) to set up manufacturing operations here. But even the growing presence of Big Pharma in their back yards has not kept the municipalities that are counting most heavily on a biotech future, like Boston and Worcester, from jumping on the bandwagon of buying cut-rate prescription drugs across the border; even drug-reimportation pioneer Springfield is hoping to incubate a biomedical industry, through collaboration between Bay State Medical Center and UMass-Amherst. Meanwhile, the lawmaker leading the charge for Canadian drugs is a state senator whose district extends almost to Kendall Square (see Argument and Counterpoint, CW, Winter ’04). In health care, it seems, we cannot help but bite the hand that feeds us.

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“Biotechnology and biomedicine may mean to the first half of the 21st century what electronics and computers meant to the latter half of the 20th century,” declares the Milken Institute. That is an exciting, but also worrisome, prospect. The information-technology and telecommunications revolutions that drove the US (and Massachusetts) economy to dizzying heights in the 1990s also improved productivity in every industry that purchased its wares. It is hard to see the coming biomedical boom setting off a similarly virtuous cycle as it ripples through the economy.

We are blessed to live in a time when medical breakthroughs that improve the lives of millions take place every day. And we are blessed to live in a place where those breakthroughs promise to make millions for local institutions, researchers, and entrepreneurs, providing a bounty that we all share through a robust Massachusetts economy. But as long as we buy personal access to the health system principally by means of employer-based insurance–a vestige of the federal decision in the 1940s to exempt non-wage benefits from wartime price controls–most of the dollars that go into the pocket of our flourishing health care industry will come out of the pockets of employers in every other industry. Never before have we counted so heavily for our economic future on a sector whose growth we are so anxious to restrain.

How that paradox will be resolved is far from clear. Health care payers, providers, and experts are playing it by ear in this post-managed care era, in hopes of improvising their way toward a new system that will restrain costs without compromising care or impeding progress. But it puts health care at the top of the agenda, public and private, for the foreseeable future. My hope is that this special issue of CommonWealth helps to define that agenda.