Working at Cross Purposes: Health Care Expansions May Jumpstart Local Economies but Fuel Nation's Fiscal Woes

Originally published by the Center for Studying Health System Change (HSC) as Commentary No. 5, August 2011.

Local Health Care Expansion vs. National Fiscal Challenges

For communities hit hardest by the great recession, expanding the local health care sector can look like an attractive path to economic recovery. Health care jobs are relatively recession-proof, tend to pay well, and demographic and technological trends suggest the industry will continue growing. Employment in health care grew steadily throughout the economic downturn even as the rest of the economy contracted. Some cities, notably Pittsburgh, are held up as models of communities that successfully transformed their economic base from heavy industry to medical care.

Local governments can encourage health sector growth in various ways, including zoning exceptions, tax abatements, and direct funding of capital improvements and operations. In debates about whether to support health care expansion, the presumed economic benefits to the local economy often carry significant weight.

Health Spending Growth: A National Fiscal Threat

While local leaders may see health care expansion as an economic boon, federal policy makers view growth in health care spending as the nation's greatest long-term fiscal challenge. Federal spending on health care, primarily through Medicare and Medicaid, equaled 5.5 percent of gross domestic product at the time of the analysis and was projected to roughly double over the following 25 years. This projected increase resulted entirely from growth in health care costs rather than from the 2010 health reform law.

Understanding why health care spending growth poses a national problem while simultaneously appearing as an attractive economic development strategy at the local level requires grasping a fundamental distinction. Health care markets are local: hospitals compete for patients within geographic areas, and physicians practice in specific communities. But the financing of health care, particularly through Medicare and employer-sponsored insurance, operates on a national scale. When a community expands its health care capacity, the additional spending is largely financed by federal programs and national insurance pools rather than by the local economy.

Expand Locally, Spend Nationally

The authors, Chapin White and Paul B. Ginsburg, describe this as the "expand locally, spend nationally" dynamic. A local community that builds a new hospital wing or adds a cardiac surgery program captures the economic benefits of those jobs and investments locally, but the costs are spread across the federal tax base and the premiums paid by employers and employees across the country. From the local perspective, the benefits are concentrated while the costs are diffused, creating a rational incentive for local officials to support health care expansion even when the national interest calls for spending restraint.

This misalignment of interests helps explain why national efforts to contain health care spending face persistent opposition at the local level. Proposals to constrain Medicare payments, for example, translate directly into revenue losses for local hospitals and physician practices, even if those constraints are necessary from a national fiscal perspective. The economic and political power of health care providers within their communities makes it difficult for elected officials to support spending reductions that would affect major local employers.

Policy Implications

Recognizing this structural tension between local economic interests and national fiscal imperatives is critical to designing health financing arrangements that better align the two. The authors suggest that reforms giving local communities a greater financial stake in the total cost of care for their residents, rather than allowing them to externalize costs onto the national system, could help resolve this conflict. Payment models that establish spending targets or global budgets at the regional level, for instance, would force local stakeholders to weigh the economic benefits of health care expansion against the impact on their own budgets rather than treating national insurance programs as an unlimited source of revenue.

Sources and Further Reading

White, Chapin, and Paul B. Ginsburg, "Expand Locally, Spend Nationally: Why Jumpstarting Local Economies through Health Care Expansions Hampers Federal Deficit Reduction Efforts," Commentary No. 5, Center for Studying Health System Change (August 2011).

Congressional Budget Office, "The Long-Term Budget Outlook" (various years).