Reducing Hospital Costs Can Benefit the Region’s Economy

Congress is now going back to the drawing board after the Joint Select Committee on Deficit Reduction, commonly known as the “Super Committee,” failed to reach agreement on a plan to reduce the federal deficit. The problem isn’t just partisanship and unwillingness to compromise. Congress can’t control the deficit unless it can find a way to reduce the growth of healthcare costs, since one-half of the projected growth in federal spending over the next decade will come from growth in the Medicare and Medicaid programs.

Healthcare costs are not just a problem for the federal government. High health insurance premiums are increasingly making businesses uncompetitive, and they’re making health insurance less and less affordable for individuals and families.

The biggest driver of healthcare cost increases is hospital care. Over one-third of the growth in national healthcare spending over the past decade has been caused by higher spending on hospital care, far more than spending on either physician services or pharmaceuticals. Any long-term solution to healthcare costs will require that we significantly reduce the growth in spending on hospitals.

Nowhere is this more true than in Pittsburgh. According to American Hospital Association data, Southwestern Pennsylvania has more hospital beds relative to the size of its population than any of the forty largest metropolitan regions in the country. “More” is actually an understatement – the Pittsburgh Region has 50% more hospital beds per capita than the U.S. average, and three times as many beds per capita as Dallas, Detroit, or Seattle.

Not only do we have more hospital beds, we fill them with patients more often than other regions. In 2008, the Pittsburgh Region had the highest rate of hospital admissions per capita among the top 40 regions in the country. We also had the fourth highest rate of emergency room visits and the second highest rate of surgeries per capita of any major region in the country.

The high rate of hospitalization here is not because we have an older population. In fact, if you just compare hospitalization rates among Medicare beneficiaries, you find that the seniors living in Pittsburgh are hospitalized much more often than in other regions. All that hospitalization doesn’t lead to better health, either; it just leads to higher costs. (See Less Health Care Could Be Better For Us.)

But haven’t hospitals been one of the major contributors to our region’s economic growth? Won’t cutting hospital spending mean fewer jobs and higher unemployment?

While it’s true that over the past decade, more jobs have been created in healthcare than any other sector of Pittsburgh’s economy except for professional and business services, those jobs haven’t been created in hospitals. Despite significantly higher spending on hospitals, there are fewer people working in hospitals here today than twenty years ago. All of the healthcare job growth in Pittsburgh over the past two decades has been in ambulatory care services, particularly physicians’ offices.

Hospital spending hasn’t gone up because of higher wages for hospital workers, either. In fact, hospitals in Pittsburgh pay their employees less than hospitals in any other major region. In 2008, average compensation for hospital staff here was 25% below the national average. For example, registered nurses in Pittsburgh had lower average salaries than nurses in 36 of the top 40 regions in the country.

What’s been driving the growth in hospital spending is that hospitals have been building more facilities, buying expensive equipment, and using expensive medical devices and drugs. This is particularly true in Pittsburgh. In 2008, more than 55% of hospital spending here went to non-personnel costs, compared to a national average of less than 49%.

This means that hospital spending in Pittsburgh could be reduced significantly without cutting hospital jobs at all and without harming patients. Hospitals in other parts of the country have found ways to significantly reduce their costs through more efficient scheduling of procedures, better methods of purchasing equipment and medical devices, and eliminating unnecessary expenses. Many of the techniques for doing this were pioneered here in Pittsburgh by the Pittsburgh Regional Health Initiative. Hospital employees could help reduce costs and actually improve the quality of care for patients by learning these techniques and using them more systematically.

Today, however, hospitals are rewarded for the types of equipment they have and how many procedures they do, not for their quality or efficiency. Employers in Pittsburgh need to demand that health insurance plans give patients incentives to choose more efficient hospitals, as employers and health plans in other regions are doing. (See Creating the Right Kind of Competition in Health Care.)

The biggest opportunity to reduce spending on hospitals, though, is by helping people avoid the need for hospital care in the first place. One reason there are more hospital admissions here is that people in other regions are getting better preventive care and care management than we are. For example, thousands of hospital admissions for chronic diseases could be prevented if we made fairly simple, low-cost improvements in our region’s primary care services.

If we do a better job of keeping people well so they don’t need to be hospitalized as often, we’ll need fewer hospital beds and fewer hospital employees. But that doesn’t necessarily mean unemployment for healthcare workers, because helping people stay out of the hospital will require more jobs in primary care, home health agencies, and other ambulatory care services. The healthcare careers of the future will increasingly be in primary care and home care, not in hospitals.

Having fewer hospital beds doesn’t necessarily mean we should have fewer hospitals, either. In fact, if we want to ensure hospital care is delivered as efficiently as possible, we need to have a choice of hospital systems and to make that choice based on both the cost and quality of hospital services.

The bottom line is that reducing spending on hospital care can actually boost the region’s economy, not harm it. Lower health insurance costs will give our families more money to spend, make our businesses more competitive, and create more jobs for everyone. And if we want to attract more businesses and families to Pittsburgh, one of the best ways to do that is to offer lower-cost, higher-quality healthcare than other regions.

(A version of this post appeared as the Regional Insights column in the Sunday, December 4, 2011 Pittsburgh Post-Gazette.)