Economic impact of public sector spending on health care.
Abstract: Public sector spending on health care clearly has a positive economic impact on local communities. Not only does such spending provide residents with better health care, but it is widely recognized as an investment that returns continual dividends in the form of better jobs, higher incomes, and additional state and local tax revenues.

The results of a static input/output model shows that public sector spending on health care of approximately $46 billion (in 2009 dollars) in the state of Texas yields over 588,000 jobs, $74.2 billion in total output, $26.3 billion in personal income, $22 billion in employee compensation, and $1.8 billion in state and local taxes; it clearly has a considerable positive economic impact on local economies and their quest for economic development.
Article Type: Report
Subject: Medical care, Cost of (Economic aspects)
Public sector (Economic aspects)
Author: Hy, Ronald John
Pub Date: 09/22/2011
Publication: Name: Journal of Health and Human Services Administration Publisher: Southern Public Administration Education Foundation, Inc. Audience: Academic Format: Magazine/Journal Subject: Government; Health Copyright: COPYRIGHT 2011 Southern Public Administration Education Foundation, Inc. ISSN: 1079-3739
Issue: Date: Fall, 2011 Source Volume: 34 Source Issue: 2
Geographic: Geographic Scope: United States Geographic Code: 1USA United States
Accession Number: 304050528
Full Text: INTRODUCTION

State and local governments are in the midst of significant economic and demographic shifts that will reshape their funding and development over the next decade. The impact of public sector spending on health care is one area that definitely will reshape state and local economies because it is, and will continue to be, a principal cost of governments. Public sector health spending, however, is not only a cost, but it also is a source of economic development.

In recent years, a great deal of research has focused on health care spending. For the most part, the research has focused on identifying and examining factors that have contributed to spending growth and proposing policy solutions to reduce or contain that spending growth. The predominant factors that have been studied are those that contribute to spending growth--utilization, population demographics, price inflation, and advances in medical technology. (http://aspe.hhs.gov/health/costgrowth/#employers).

This focus has been stimulated by research that has demonstrated that, over the last ten years, health care spending grew at an extremely fast rate; and economists are concerned that the state and local economies may be negatively affected by increasing health care costs. Health care expenditures in the United States are the highest among 30 high-income countries, both as a percentage of Gross Domestic Product (GDP) and in per capita terms. In 2009, the health spending share of GDP reached 16.2 percent, up from 15.9 percent in 2007. (This figure includes health care goods and services, public health activities, program administration, the net cost of private insurance, and research and other investment related to health care.) (http://www.cms.hhs.gov/NationalHealthExpendData/ 02_NationalHealthAccountsHistorical.asp) According to the Milliman Medical Cost Index--shown in Figure 1--the total medical costs in 2009 for a family of four was $16,771, compared to $15,609 in 2008--a 7.4 percent increase. The increase of $1,168 was the highest since 2006, when that increase equaled 9.6 percent.

Figure 2 shows in more detail the five major health expenditure categories for a family of four: (1) pharmacy, (2) physician, (3) outpatient services, (4) inpatient services, and (5) other minor expenditure categories.

More important, however, is the fact that government programs, such as Medicare and Medicaid, account for a significant share of health care spending. Public health expenditures made up about 46% of the health care dollar in 2007, with the remainder split between private and out-of-pocket spending (42% and 12%, respectively). (http//aspe.hhs.gov/health/costgrowth/#Introduction) In summary, not only are health costs rising, but they also are having a tremendous impact on state and local economies.

Health Care Spending in Texas

Figure 3 shows the total health care expenditures as percent of GSP for each state.

[FIGURE 3 OMITTED]

The exhibit illustrates that overall health care accounts for a slightly smaller share of economic activity in Texas than it does in the U.S--11.7 percent of Texas GSP as compared to 13.3 percent of U.S. GNP in 2005. (Kaiser Family Foundation, 2007) More specifically, however, the Texas Comptroller of Public Accounts (Rylander, 2001) estimated that:

* The percentage of health care provided by the private sector in Texas was 56%, compared to 52% in the United States

* The percentage of Health Care Provided by the Public Sector in Texas was 44%, compared to 48% in the United States

ISSUE TO BE ADDRESSED

Despite the voluminous research focusing on health care costs, there is an unmet need for better information concerning the economic impact of public sector spending on health care on local economies. There simply is a lack of data tailored toward the understanding of the holistic effects of public sector spending on health care in local communities. By using the state of Texas is as a case study, this research endeavors is to examine how public sector spending on health care by the federal, state, and local governments impacts local economies in the United States.

This analysis examines the economic impact of public sector spending on health care on local communities. It is not designed to determine whether other expenditures would be more or less beneficial; nor is it intended to focus on the net impact of such spending. Admittedly, the money allocated for public health care spending could have been allocated to other sources so that the economic impact on local communities could be different. But, governmental decisions were made to allocate the funds to public health spending. Thus, this analysis evaluates the economic impact of public health spending on local communities

LITERATURE REVIEW

Understanding the economic impact of public sector spending on health care at the local level is important because economists have suggested that increasing health care spending could lower economic growth and employment at the local level. (Monaco and Phelps, 1995: 248-259.) Other economists have noted that increasing health care spending has important benefits, often outweighing the increased costs. At a local level, health care spending is viewed as economically beneficial because it creates jobs, increases wages, expands local tax revenues, and increases demand for related goods and services. (Cutler and McClellan 2001: 11-29.) In other words, public sector spending on health care is viewed as an impetus for sectoral and local prosperity. Essentially, the health sector is a significant source of income for local economies.

While many researchers have examined factors that have contributed to spending growth at the state and local levels of government, little research has focused on the economic impact of public sector spending on health care at the local level. (Bunting and Jones, 2006:6) In a study using the State of Washington as case study, Bunting and Jones concluded that "the sub-national economic significance of the health care industry as measured by share of total output, income or employment ... is one of the leading or industries in every region in the state." (Bunting and Jones, 2006:24) This study builds on the Bunting and Jones study by examining the economic impact of public sector spending on health care on the 11 Public Health Regions in the State of Texas, which are shown in Figure 4.

[FIGURE 4 OMITTED]

The extent to which public sector spending on health care affects personal income, employee compensation, employment, and tax revenues in each of the 11 Public Health Regions is examined using a static input/output economic model.

METHODS AND DATA

A striking development in recent years has been the increased emphasis on the use of static input/output economic models to analyze the effects of expenditures on an economy. Static input/output models are based on system dynamics, which assumes that all causal factors are connected in a circular process and affect each other. Input/output models attempt to quantify the mutual interrelationship and interdependence of multiple economic sectors within a complex economic system. Such models measure patterns of the flows of goods and services in the economy, and use these measured patterns to simulate economic impact (Hy and Wollscheid, 2008: 787). These patterns are measured by a series of sectoral allocation equations, each including several interdependent variables. The models, therefore, estimate mathematical relationships among business and industry, household, and government outputs, using dollars as the primary means of measurement (Leontief, 1986: 4). They change the focus from linear to circular causality and from independent to interdependent relationships.

Basic Input/Output Model

Figure 5 illustrates five basic relationships intrinsic to input/output models, each consisting of a number of equations designed to measure certain functions.

In this model, local consumption and demand, along with wages, prices, and profits determine employment. Capital demand depends on the relative cost of capital and labor and on local consumption and demand. Labor supply depends on population and wages, prices, and profits. Demand and supply interact to determine wages, prices, and profits. Local consumption and demand, together with wages, prices, and profits, determine market shares. Directly, and indirectly, these relationships are interrelated. Thus, estimates derived from the model are the result of satisfying all the equations simultaneously (Treyz, 1995).

These transactions (sales and purchases) are systematically classified and tabulated in order to show the dollar value of trading among all sectors of the economy. A transaction (input/output) table summarizes the origins of the inputs and the destination of the outputs for all sectors of the economy. (See Appendix A.)

[FIGURE 5 OMITTED]

ANALYSIS

The following analysis of public sector spending on health care in Texas is based on a static input/output economic model, IMPLAN, which creates complete, extremely detailed Social Accounting Matrices and Multiplier Models of local economies to enable users to make in-depth examinations of state, multi-county, county, sub-county, and metropolitan regional economies.

The state of Texas identified the amount of public funds spent for private and government health care programs by counties in the state and adjusted the health care data to eliminate duplication. (Rylander, 2001). The types of public health sector spending included in that study were state employee health insurance, school district health insurance, Medicare, Medicaid, U. S. health and human services, military, veteran's administration, mental health, and prisons. Table 1 shows the relative percentage of public sector spending on health care within the 11 Health Service Regions in Texas. Regions 3 (Dallas/ Fort Worth area), 6 (Houston area), and 7 (Austin area) received the highest percentage of funding for health services; while Regions 2, 9, and 10 (West Texas areas) received the least.

Since the public health expenditures were collected at the county level, the money was allocated to the appropriate counties within the 11 Health Service Regions to estimate the economic impact of public health sector spending in each Health Service Region. The analysis considers the direct, indirect, and induced effects of health spending in each of the 11 Health Service Regions.

Figure 6 defines direct, indirect, and induced effects.

FINDINGS

Personal Income, Employee Compensation, Employment, and Total Output

Table 2 shows the direct, indirect, and induced effects of public sector spending on health care in the 11 health service regions in the state of Texas.

Most of these findings are straightforward. Personal income includes all sources of employment income, including transfer payments. In 2009 dollars, the amount of personal income generated from public sector spending on health care was approximately $26.3 billion. The amount of employee compensation, which includes wages and salaries, health and life insurance benefits, retirement payments, and non-cash compensation, was $22 billion. In addition, over 588,000 jobs were created. Most of these jobs--as illustrated in Table 3--are in the manufacturing, transportation, and warehousing sectors.

Public sector spending on health care also generated $74.2 billion in total output, the value of goods and services produced for the year--that is, additional economic activity. Furthermore, it generated approximately $1.8 billion in state and local taxes.

Health Service Region 7 (Austin area) and to a lesser extent Region 3 (Dallas/Fort Worth area) seem to benefit the most since they generated the largest amount of total output. The Health Service Regions 2, 9, and 10 (West Texas) benefitted the least from health care spending because these regions are the most sparsely populated areas of the state and received the least amount of health dollars. (See Table 5.) However, Region 6 (Houston area) and Region 3 (Dallas/Fort Worth area) created more jobs with their health dollars than did other regions.

Table 3 shows that in almost all of the heath service regions the economic sectors that enjoy the greatest benefit were transportation, warehousing, and manufacturing. (Transportation includes the cost associated with the transportation of durable and nondurable products. Warehousing accounts for the cost associated with the storing durable and nondurable products. Manufacturing incorporates the cost associated with the production of durable and nondurable products. Utilities include the cost associated with the communications, electric, gas, and sanitary services.)

Taxes

As mentioned previously, tax revenues are generated by economic activity. The economic activity resulting from public sector spending on health care allows governments to generate greater revenues with current tax rates or can result in lower tax rates generating the same amount of money.

Public sector spending on health care also allows for the purchase additional housing and, thus, generates increased property taxes. This type of proactive spending creates a business climate that attracts new (and expanded) businesses that in turn increase property tax revenues, especially when business property is subject to higher rates and/or broader bases than residential property. Then, too, health spending contributes to a growth in employment. Table 4 reveals the amount of state and local taxes generated via public sector spending on health care was $1.8 billion.

Table 5 demonstrates that the economic impact in each health service region varies correspondingly with the amount of money spent in those regions. A closer examination of the data, suggests that degrees of variance among the health service regions do not vary significantly.

CONCLUSION

In the past, public sector spending on health care has focused on one main objective--providing quality health care. Over the years, the role of public sector health care spending has evolved into a broader mission that better supports state and local economic development efforts. This change has been driven by the evolution of the national, state, and local economies. Health expenditures are seen as an investment in the community.

Public sector spending on health care clearly has a positive economic impact on local communities. Not only does such spending allow residents to achieve better health care, but it is widely recognized as an investment that returns continual dividends in the form of better jobs, higher incomes, and additional state and local tax revenues. Public sector spending on health care of approximately $46 billion (in 2009 dollars) yields over 588,000 jobs, $74.2 billion in total output, $26.3 billion in personal income, $22 billion in employee compensation, and $1.8 billion in state and local taxes; it clearly has a considerable positive economic impact on local economies and their quest for economic development. These findings, suggest that public sector spending on health care has a strong impact on employment, human resources, technology transfers, and quality of life.

As mentioned previously, employing health professionals allows for the purchase more expensive housing and, thus, generates higher property taxes, in addition to creating a proactive business climate that attracts new (and expanded) businesses whose property taxes are subject to higher rates and/or broader bases than residential property.

Caveat

While these results should not be regarded as absolute; they nevertheless indicate overall patterns. These findings identify those economic sectors that benefit from public sector spending on health care. The magnitude of these benefits also is identified. Finally, it is clear that additional personal income, employee compensation, and tax revenues are generated. While health expenditures have a positive and an immediate impact on the state and local economies, it should be noted that long-term effects depend on how the money is spent.

REFERENCES

Bunting, and Jones, D. (2006). "The Economic Impact of Health Care Spending in Washington State" Paper presented at the annual meeting of the Economics of Population Health: Inaugural Conference of the American Society of Health Economists,, Madison, WI, June, 6-24. Retrieved from http://www.allacademic.com/meta/p93453 index.html

Cutler, D. and McClellan, M. (2001). "Is Technological Change in Medicine Worth It? Health Affairs, September/October, 20, No. 5, 11-29.

Health Professions Resource Center, Center for Health Statistics, Texas Department Of State Health Services, (2009)

http://www.dshs.state.tx.us/chs/hprc/09trends.pdf

http://aspe.hhs.gov/health/costgrowth/#Introduction

http://www.cms.hhs.gov/NationalHealthExpendData/ 02_NationalHealthAccountsHistorical.asp

Hy, R. and Wollscheid, J. (2008). "Economic Modeling," In Handbook of Research Methods in Public Administration, ed. Kaifeng Yang and Gerald Miller, Boca Raton, Fla: Taylor and Francis.

http://www.milliman.com/expertise/healthcare/publications/mmi/

Kaiser Family Foundation (2004). "Total Health Care Expenditures as a Percent of Gross State Product (GSP), (2004)." Kaiser Family Foundation: StateHealthFacts.org. 5 July 2007 http://www.statehealthfacts.org/cgibin/ healthfacts.cgi?action=compare&category=Health+Costs+%26+Budgets&subcategory= Health+Care+Expenditures&topic=Health+Spending+as+%25+GSP.

Leontief, W. (1986), Input-Output Economics, 2nd. ed. Oxford University Press, New York.

Monaco, R. and Phelp, J. (1995). "Health Care Prices, The Federal Budget, and Economic Growth, Health Affairs, Summer, 14, No. 2, 248-259.

Rylander Carole Keeton (2001). Texas Comptroller of Public Accounts, U.S. Department of Health and Human Services, Health Care Financing Administration. http://www.window.state.tx.us/specialrpt/hcs/

Treyz, G. (1995), Model Documentation for the REMl EDSF-53 Forecasting and Simulation Model. Regional Economic Models, Inc., Amherst, Mass.

RONALD JOHN HY

University of North Texas at Dallas
Appendix A

Data Sources

[check] An input/output model is built with data gleaned from
various sources. No single data source can be used,
however, since a variety of agencies gather, organize,
and publish statistics. The Department of Labor is
mainly, but not entirely, in charge of employment, wage,
and cost of living statistics. Information on railroad
freight and trucking freight is collected by the Interstate
Commerce Commission and information on air
shipments is collected by the Federal Aviation
Administration. The Federal Power Commission is the
principal collector of data for electric and power
companies, whereas the Department of Interior is the
primary gatherer of coal and oil output data.

[check] As a result of these decentralized data sources and
processes, an input/output model incorporates data
collected from a wide variety of sources. The three
primary sources are (1) the Bureau of Economic
Analysis (BEA), (2) the Bureau of Labor Statistics
(BLS), and (3) County Business Patterns (CBP).

[check] The Bureau of Economic Analysis (BEA) has
employment, wages, and personal income series data.
These series contain data such as employment, personal
income, wage and salary disbursements, other forms of
labor income, proprietors' income, rental income,
dividends, interest, transfer payments, and personal
contributions for social insurance.

[check] Another vital source of data used with these models is
the Bureau of Labor Statistics (BLS). BLS data are used
to generate Regional Purchasing Coefficients (RPCs) for
economic models. (RPCs are measures that show how
much one sector purchases from another sector and, as
such, is a major component of any economic model.)

Source: Hy, R. J. and J. Wollscheid 2008: 801).


Table 1
Percent of Health Spending by Public Service Region

                                   % of Health
                                    Spending

Public Health Service Region 1           7.0%
Public Health Service Region 2           4.4%
Public Health Service Region 3          18.0%
Public Health Service Region 4           6.6%
Public Health Service Region 5           5.5%
Public Health Service Region 6          17.5%
Public Health Service Region 7           9.3%
Public Health Service Region 8          12.9%
Public Health Service Region 9           3.3%
Public Health Service Region 10          3.8%
Public Health Service Region 11         11.6%

Source: http://www.window.state.tx.us/specialrpt/hcs/

Table 2

Total Personal Income, Employee Compensation, and Employment and
Taxexs Generated from Health Spending by Health Service Region
(in 2009 Dollars)

                            Personal       Employee      # of
Economic Sector              Income      Compensation    Jobs

Health Service Region 1    $1,523,371     $1,237,044    34,689
Health Service Region 2      $925,817       $731,251    23,136
Health Service Region 3    $4,931,724     $4,092,861    92,071
Health Service Region 4    $1,550,423     $1,307,866    36,482
Health Service Region 5    $1,097,975       $933,860    27,058
Health Service Region 6    $4,369,186     $3,684,038    97,175
Health Service Region 7    $4,525,110     $3,960,489    85,602
Health Service Region 8    $3,248,678     $2,586,786    77,310
Health Service Region 9      $660,559       $572,816    16,844
Health Service Region 10     $827,517       $625,977    20,969
Health Service Region 11   $2,633,471     $2,327,874    77,456

Total for All Regions      $26,293,833   $22,060,863    588,791

                                          State &
                              Total      Local Tax
Economic Sector              Output        Impact

Health Service Region 1    $4,271,554      $95,899
Health Service Region 2    $2,632,777      $50,551
Health Service Region 3    $12,518,453    $382,338
Health Service Region 4    $4,081,521      $92,209
Health Service Region 5    $3,147,596      $60,594
Health Service Region 6    $9,435,603     $327,625
Health Service Region 7    $18,173,759    $364,495
Health Service Region 8    $8,643,011     $238,473
Health Service Region 9    $1,958,135      $39,609
Health Service Region 10   $2,317,349      $53,474
Health Service Region 11   $7,041,729     $156,695

Total for All Regions      $74,221,486   $1,861,963

Table 3

Economic Impact by Health Service Region

industry Impact           Region 1      Region 2      Region 3

Ag, Forestry, Fish &       $10,067        $5,234       $15,380
  Hunting
Mining                     $24,986       $10,275       $43,398
Utilities                  $40,777       $18,652      $124,990
Construction               $14,972        $5,082       $52,740
Manufacturing           $1,193,413      $498,015    $4,663,128
Wholesale Trade             $5,189        $2,178       $16,858
Transportation &        $4,804,452    $2,957,675    $13,822,022
  Warehousing
Retail trade               $28,133        $9,148      $104,759
Information               $144,343       $61,956      $387,749
Finance & insurance        $60,384       $32,660      $156,826
Real estate & rental       $22,888       $11,197       $36,639

Industry Impact          Region 4      Region 5      Region 6

Ag, Forestry, Fish &       $11,676        $6,898        $8,644
  Hunting
Mining                     $20,164        $5,608       $49,680
Utilities                  $36,807       $10,760      $119,396
Construction               $13,757        $9,649       $41,556
Manufacturing             $918,244      $530,462    $3,859,663
Wholesale Trade             $4,141        $2,553       $16,139
Transportation &        $4,887,080    $3,577,611   $12,847,439
  Warehousing
Retail trade               $14,434        $9,519       $65,808
Information               $113,406       $69,072      $332,855
Finance & insurance        $49,816       $32,163      $117,984
Real estate & rental       $15,290       $12,660       $29,662

Industry Impact          Region 7      Region 8      Region 9

Ag, Forestry, Fish &       $31,116       $21,002        $3,781
  Hunting
Mining                     $47,038       $23,295        $9,112
Utilities                  $79,645       $35,253       $10,114
Construction               $50,179       $42,075        $3,953
Manufacturing           $4,183,370    $2,851,954      $394,885
Wholesale Trade             $9,473        $9,586        $1,719
Transportation &        $13,539,463   $9,372,767    $2,098,096
  Warehousing
Retail trade               $74,164       $73,482        $6,821
Information               $358,413      $244,538       $46,498
Finance & insurance       $166,034      $125,446       $17,498
Real estate & rental       $57,557       $46,595        $6,908

Industry Impact          Region 10     Region 11

Ag, Forestry, Fish &        $1,212       $12,951
  Hunting
Mining                      $2,670       $13,075
Utilities                  $13,805       $34,232
Construction                $6,646       $25,091
Manufacturing             $544,693    $1,550,200
Wholesale Trade             $1,634        $6,795
Transportation &        $2,535,048    $8,540,319
  Warehousing
Retail trade                $9,075       $39,114
Information                $51,280      $180,341
Finance & insurance        $25,598       $86,398
Real estate & rental        $8,191       $37,669

Table 4

State and Local Taxes

                           State & Local
                            Tax Impact

Health Service Region 1         $95,899
Health Service Region 2         $50,551
Health Service Region 3        $382,338
Health Service Region 4         $92,209
Health Service Region 5         $60,594
Health Service Region 6        $327,625
Health Service Region 7        $364,495
Health Service Region 8        $238,473
Health Service Region 9         $39,609
Health Service Region 10        $53,474
Health Service Region 11       $156,695

Total for All Regions        $1,861,963

Table 5
Percent of Health Spending Impact by Public Health
Service Region

                                             % Total     % Taxes
                                              Output    Generated
                                    % of       from       from
                                   Health     Health     Health
                                  Spending   Spending   Spending

Public Heath Service Region 1        7.0%       5.8%        5.3%
Public Heath Service Region 2        4.4%       3.5%        3.0%
Public Health Service Region 3      18.0%      16.9%       20.5%
Public Health Service Region 4       6.6%       5.5%        5.5%
Public Health Service Region 5       5.5%       4.2%        3.9%
Public Health Service Region 6      17.5%      12.7%       17.8%
Public Health Service Region 7       9.3%      24.5%       17.6%
Public Health Service Region 8      12.9%      11.6%       12.4%
Public Health Service Region 9       3.3%       2.6%        2.3%
Public Health Service Region 10      3.8%       3.1%        2.8%
Public Health Service Region 11     11.6%       9.5%        8.9%

Figure 1
Annual Medical Costs

Annual Medical Cost for Family of Four

2005    $12,214
2006    $13,382
2007    $14,500
2008    $15,609
2009    $16,771

Source: http://www.milliman.com/expertise/healthcare/publications/mm

Note: Table made from bar graph.

Figure 2
Health Expenditure Categories for a Family of Four

Pharmacy     $2,484
Physician    $5,760
Outpatient   $2,772
Inpatient    $5,088
Other        $667

Note: Table made from bar graph.

Figure 6 Definitions of Direct, Indirect, and Induced Effects

[check] Direct effects are those changes associated with immediate
changes in demand generated by employment, personal and household
income, governmental expenditures, and private and public capital
investment and formation.

[check] Indirect effects are changes resulting from the direct needs
Of businesses and governments. Essentially, these are interindustry
impacts that measure the effects on employment, household income,
governmental expenditures, and private and public capital
investment and formation added from industry purchases of items
needed to provide a service or a product. For example, construction
contractors buy goods and services from other sectors that ,in
turn, purchase goods and services from other suppliers, each of
whom makes additional purchases from still other suppliers.
Indirect effects measure the impacts of these purchases.

[check] Induced effects are changes in spending patterns of
Households resulting from changes in household income-generated by
both direct and indirect effects. These new expenditures are
reintroduced into the economy as a new demand. Thus, their
indirect effects are related to sector interaction, whereas
the induced effects are related to consumption.

Source: Hy and Wollscheid, 2008: 787
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