John Locke Update / Research Brief

Hospital Association/RTI Study: Transforming Sickness Into Economic Health

posted on in Economic Growth & Development, Economics & Environment, Health Care, Health Care & Human Services
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A recently released report paid for by the NC Hospital Association (NCHA) and prepared by the Research Triangle Institute (RTI) has, from an economics perspective, a number of flaws.  Its most outrageous implication, however, is that getting sick is good for the economy.

According to a press release from the NCHA, the study concludes that North Carolina’s “hospitals and health care systems boost [the state’s] economy.” According to the RTI report, they “generated $22.4 billion in labor income and $37.8 billion in gross domestic product last year.” The study also concludes that “hospitals directly and indirectly support nearly 400,000 jobs.” By claiming that this represents a “boost” to the economy, the unstated assumption is that these increases in GDP and jobs would never have materialized if people didn’t get sick and have to spend their hard earned income on health care services.

From an economics perspective, there are an array of problems with studies like this one, which uses prepackaged economic impact models. (RTI uses a commercial model called IMPLAN.) A more detailed analysis of these problems can be found here. But because of the particular industry being assessed in this study, i.e. the health care industry, its conclusions suffer from much more than the many economic fallacies that are embedded in these models. The NCHA/RTI report is not only economically meaningless but flies in the face of nearly all economic analyses that describe how increased health care cost impacts the economy.

The RTI researchers start their analysis by gathering data on what, in any other circumstance, would be put in the category of health care costs. But in their analysis, the word “cost” is never used. RTI refers to these costs as “expenses” and “expenditures” and later on as “benefits.” The three major categories of inputs into their study are operating, capital, and payroll expenditures. They describe the first two as follows:

Operating expenditures are regularly incurred expenses necessary for day-to-day operations. These expenditures could include expenses such as payments to insurance companies, utilities, management services, and legal services. Capital expenditures are purchases of or investments in long-term goods. These expenditures could include expenditures on surgical equipment or construction of new buildings.

Payroll expenditures refer to the payroll costs of doctors, nurses, clerical staff, etc.

The point to be emphasized here is that all of these “expenditures” are actually social costs generated by the fact that people get sick and have to spend their incomes on hospitals and other health care services. Typically, health care expenditures are costs that society seeks to minimize. But the clear implication of this study is that the higher these costs are, the better it is for the economy. According to the study, North Carolina’s gross domestic product and therefore incomes are higher than they otherwise would be because of them.

So, what is this magical process that takes these “analysts” from RTI from what is widely recognized as the social burden of increasing health care costs to growth creating economic expenditures? First of all, apparently realizing that even the word “expenditure” is too easily translated into costs by most thinking people, RTI converts these costs into benefits by what might be called authoritative assertion. In other words, they simply refrain from ever referring to them as costs and instead assert that they are engaging in an analysis of benefits. To quote RTI:

The economic impact analysis in this report is structured as a benefits assessment of how the total annual expenditures of NCHA member hospitals ripple through the North Carolina economy. This activity generates wages for hospital employees, revenues, profits, and wages to sectors that supply goods and services to hospitals and health systems. (emphasis added)

In other words, what everyone typically recognizes as social costs become social benefits simply because RTI asserts that they are. What they are saying is that costs incurred by hospitals and other healthcare facilities in treating the sick, despite the fact that they are indeed costs, are transformed into a benefit for North Carolinians as a whole, in the form higher GDP and more employment as they ripple through the state’s economy.

Apparently, for those at RTI who did this study, the money that ultimately goes to paying for these costs materializes out of nowhere. The fact that people have to fork over their hard-earned income in the form of direct payments to these health care facilities, insurance companies, and the government in the form of taxes for programs like Medicare and Medicaid goes completely ignored in their analysis. If people didn’t have to incur these costs or if these costs were lower because they were healthier, this money would be spent on other goods and services, like new cars, home improvements, or music lessons for their kids. These are all expenditures that add to the stock of wealth. Health care spending is analogous to the costs associated with restoring a home that is destroyed in a hurricane or repairing a car that was damaged in an accident. These are the costs associated with maintaining existing wealth. New wealth is not added.

By ignoring this, RTI leads its audience to the conclusion that individual expenditures on hospital services leading to institutional expenditures by hospitals have an expansionary effect on the economy. And according to this study, if these expenditures were increased, it would be good for economic growth. In fact, the study boasts that every $1 increase in the expenditures, i.e., health care costs, will lead to an almost $2 increase in the state’s GDP.  This is why I asserted at the outset of this essay that the NCHA/RTI study transforms sickness into economic health. The sicker the population, the more they will have to spend on hospital services and the more hospitals will have to spend on “operating expenditures,” “capital expenditures,” and payroll. All of this, according to the study, adds up to a benefit to society in the form of greater economic growth.

Ultimately, this study should not be represented as a measure of the social benefits of health care expenditures. These benefits should be measured in terms of lives saved and health problems avoided, not in terms of jobs “created” or GDP growth from hospital spending. The expenditures by hospitals and other health care facilities are social costs, plain and simple. The use of resources in society, labor and capital that they generate are the costs that society incurs because of illness. From the perspective of sound economic analysis, such costs point toward a reduction in economic growth, or “value added” as the study calls it, not an addition to it.

To reiterate what I noted at the outset, according to RTI, North Carolina’s hospitals and other health care facilities “generated $22.4 billion in labor income and $37.8 billion in gross domestic product last year” while “hospitals…supported nearly 400,000 jobs.” A more accurate presentation of these results would be that health care related problems generated an additional $22.4 billion in labor costs, absorbed $37.8 billion of the state’s GDP and absorbed 400,000 workers from the state’s labor force.

Roy Cordato is Senior Economist and Resident Scholar at the John Locke Foundation. From January 2001 to March 2017, he held the position of Vice President for Research at the Locke Foundation. He is also an adjunct faculty member in… ...

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