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Obama’s two jobs problems

The health care industry has been one bright spot in a gloomy job market, and yet — as the new overhaul recognizes — it’s the one sector where job creation will likely need to be curbed to make federal spending more sustainable in the long term.

President Barack Obama's short-term jobs challenge is the one every president must face: in the post-World War II era, only one president — Ronald Reagan — has been re-elected when the unemployment rate was above 7 percent.

The longer-term jobs problem becomes clear when you compare charts of total employment and health care employment.

The total employment chart reflects the classic boom-bust cycle: there’s job growth coming out of the 2002 recession, peaking in early 2008, and then the sickening fall in 2009 and 2010. The plummeting began to end with the stimulus and the temporary hiring for the 2010 Census, followed by another short downturn, and finally another small recovery in recent months.

The health care jobs chart could not be more different. It’s a picture of steady increases month after month — adding up to about 2 percent annual growth in employment, year after year.

Growing despite the recession
Health care employment has been growing even during the worst months of the recession. According to the Bureau of Labor Statistics, over the past 12 months, health care added an average of 22,000 jobs per month.

(In its health care category, the BLS includes doctors, nurses, aides, and others who work in hospitals, hospices, clinics and nursing care facilities.)

Health care employment is increasing more than twice as fast as the annual growth in the U.S. population.

That's in line with the ever-increasing percentage of national income (and the federal budget) going to health care. In 1980, the United States spent 9 percent of national income on health care; today it spends nearly double that.

The president’s health care reform aims to cut the rate of increase in health care costs by pegging Medicare payments to increases in economy-wide productivity. Hospitals and hospices will need to achieve the same productivity improvements that non-health care businesses do.

Richard Foster, the Medicare system’s chief actuary, estimates that this provision in the law will save $233 billion over the next ten years. That part of the law is crucial to hitting the deficit reduction targets that its supporters in Congress promised when they voted for it last year.

Are productivity targets achievable?
But can the law achieve these productivity improvements without slowing the increase in the number of health care jobs?

“You can become more productive without reducing employment,” said Dartmouth University health care economist Jonathan Skinner. “It is certainly possible for (health care providers) to save by figuring out ways to reduce the waste of throw-away tools” and other supplies, for example.

“You can certainly end up doing more with the same number of people, and that’s a good thing, but then if you really want costs to start declining, you have to end up being more productive by doing more with the same number of people, which means growing less,” Skinner said.

Paul Van de Water, a former analyst at the Congressional Budget Office who is now with the liberal Center on Budget and Policy Priorities, said “the whole point of increasing productivity is to produce the same output with less labor input. It doesn’t make sense to create jobs by having more workers produce health care inefficiently when they could be producing some other good or service.”

“We don’t want to employ more health care workers than it takes to provide health care efficiently,” he said.

Not growing as fast as before
But, Van de Water added, “The fraction of the labor force working in the health care sector is likely to grow in future years, even with rapid productivity growth. We just don’t want it to grow to the extent that it crowds out other desirable consumption and investment. So slowing the increase in the number of health care jobs is exactly what needs to be done.”

If the health care law has the effect of slowing the growth in health care employment, that means that other sectors of the economy — manufacturing, real estate, construction, retail sales, etc. — would need to grow enough to employ those who might otherwise have found health care jobs.

But whether hospitals, skilled nursing facilities and other providers can hit the productivity targets that Congress has set is still being debated in Washington, with the answer not likely to come until the law has operated for some years.

“Like virtually every other idea for controlling health care costs, we can’t be sure that it will work, but we should make every effort to implement it and give it a chance to succeed,” Van de Water said. “The Medicare Payment Advisory Commission has found that hospitals have a lot of room to control costs if they are put under financial pressure to do so.”

But testifying before the House Budget Committee last month, Foster said that “it's doubtful that many health care providers can match or have their own productivity increased at the same rate as in the economy at-large, where you have manufacturing and other high productivity sectors.”

Health care, Foster said in a report last year, “tends to be very labor intensive” — a comment reflected in the steady upward trend line of health care employment over the past 20 years.

A 'giant sucking sound'?
For Skinner and other economists, the debate over health care productivity and jobs raises a fundamental question: What is the cost/benefit tradeoff when more and more resources are drawn into that one sector of the economy?

“My hope is that the health care overhaul will slow the increase in health care jobs,” Skinner said, arguing that "the problem with rising health care cost growth is that it creates a ‘giant sucking sound’ that drains jobs in other sectors — police and firemen and teachers who lose their jobs (or who don't get new ones) because rising health insurance premiums have become such a drain on local budgets.”

“There’s a tendency to look at these new jobs in health care and say ‘this is great,’ but you don’t see the lost workers, you don’t make the connection that those jobs come at the expense of somebody else’s job.”

For example, he said, “The special education teacher in the school district who gets dropped because health insurance premiums have gone up 20 percent. The question is: which one is more valuable? To me that’s an open question.”

Skinner said workers in other sectors of the economy are now facing or will face “declining real after-tax salaries because all of their productivity gains are going right into higher insurance premiums or higher taxes (to pay for health care), particularly in the future.”

The raucous health care debate in Congress last year touched on an array of topics: abortion, obesity, illegal immigration, the practices of insurance companies, and more.

But the central, although sometimes forgotten, issue was really the cost of creating all those health care jobs and the benefits Americans are getting from the system. It's a debate that's still in progress.