Economic Report on Nashville’s Health Care Industry
What is this report about?
This report will summarize the growing importance of the health care industry at large as well as within the Davidson County- Nashville area. We will begin by providing an overview of the health care industry by examining broad cultural trends and detailing recent US political and economic events that have contributed to health care industry growth. We will then focus in on the health care industry specific to Nashville, discussing its current scope and trends, and highlighting its particular importance to the city.
Why is Health Care important?
The primary goal of this report is to show that Nashville is distinguishing itself as a city that specializes in the area of health care. We will show that Nashville has a unique combination of strengths and qualities that have facilitated this specialization. Our conclusions will show that Nashville will continue experiencing high levels of urban growth due to the multiplier effect created by its increased specialization and expansion of its health care sector. We will recommend that positive policy measures must be encouraged to ensure the capitalization of that growth. It is important that the city hedge itself against competition by retaining its current share of health care industry business and adding additional incentives to continue attracting new firms to the city.
II. Overview of the Health Care Industry
Health Care is an important and growing industry
Health care has been a growing topic of concern in recent years. The baby boomer generation will soon be retiring which will represent a massive influx of new patients within the health care system. In addition, President Obama signed landmark health care legislation that will effectively introduce an additional 32 million new patients into the health care system by 2019 due to new insurance policy measures. Federal spending support on medicaid in 2014-2019 will top 11,000 million dollars .This will require an expansion in all sectors dealing with health care.
The health care industry is one of the fastest growing industries in the US today. It’s growth will lead to the creation of thousands of new health care related jobs on a local and national level. In additional to the positive growth within the industry, the effects of a larger health care sector will have much broader impacts on other industries. This is due to the health care industry’s reliance on an array of supporting industries that make up external economies of scale to bolster its complex and highly innovative infrastructure.
What contributes to health care growth?
Health care is a normal good, meaning that as a consumer’s wealth increases so does their health care consumption. This indicates that a strong economy would have a strong health industry. Because health care is a costly good with high premiums, patients and health care providers rely on heavy ties with insurance companies to help cover costs. As a result, health insurance drives down the cost of health care consumption, making health care more affordable, and expanding the share of people who can afford access to health care. Until recently, insurance policy regulation was left to the state. In 2008 Obama signed the Patient Protection and Affordable Health Care Act, or Obamacare, which includes an array of mandates that will expand coverage through increased medicaid, government subsidies, the expansion of coverage in children and dependents, those below the poverty line, health care policy exchanges, and many others. The Act also includes an individual mandate that forces all persons secure health care insurance either by personal means or through their employer or receive a fine.The additional access to health care provided by Obamacare will result in a dramatic increase in consumption of health care services and a massive influx of new revenues.
In addition to legislation and public policy measures, increases in technology contribute to the growth of the health care industry by increasing efficiency. Because hospital systems and medical centers do not face the same competition and externalities as other industries they are slower to adopt advantageous technology that would increase business efficiency. This has resulted in an increasingly overburdened and inefficient health care system. In 2009 congress signed the Health Information Technology for Economic and Clinical Health (HITECH) Act, enacted as part of the American Recovery and Reinvestment Act. This legislation includes a formula of incentives and penalties to encourage health care systems integrate and implement certain information technology systems to get health care up to date with efficient business management and IT practices by a 2015 deadline. Some of these measures include the discarding of paper-based records and the adoption of digital medical health records and establishing data base networks to facilitate information exchange among health care providers. According to one study, the adoption of digital health records increases efficiency by 6%. This increase in efficiency will offset any short term costs associated with its integration, and provide enormous long-term savings.
The increases in health care access resulting from Obamacare, and the increases in efficient technology practices are some of the primary drivers that will continue to contribute to rising growth of the health care industry. By 2018 one in six new jobs will be health care related, translating to an additional 2.8 million workers.
Why does Health Care locate where it does?
Health care companies look for certain qualities within a region when deciding to locate to a city. These qualities include: (1) good quality life, (2) major transportation and communications structure, (3) diverse economic base, (4) a sound financial infrastructure, (5) professional services, (6) highly skilled labor force.
When deciding where to locate a headquarters there is no exclusive geographic reason why a health care company would chooses to locate in one particular city over another. Unlike many manufacturing industries, health care is not directly tied to the geography for its raw material resources or transportation conveniences associated with shipping. Instead, much of health care depends upon intangible capital such as human capital, communication networks, and linkages within established supporting industries such as in financial, insurance, and legal services. Like the information technology industry found Palo Alto, CA, Health care requires a high concentration of human capital to function. As a result companies will naturally locate to areas where human capital for labor is abundant and the quality of life is favorable.
The geographic considerations involved with firm location may include quality of life associated with environmental factors such as climate, air pollution, and access to natural amenities. Advances in transportation and communication mean that location is not a major priority as patients can fly long distance to receive medical care they might need. Doctors and other specialists also retain this convenience. However, once a medical center is established and capital deepening has occurred within medical care systems, it is more advantageous to travel to a specialized facility.
Aside from the capital associated with hospitals, clinics and other medical centers, companies involved with the administration, consulting, and IT aspects of health care have the communication networks to manage and monitor from afar. The advantage of choosing one location over another for a headquarters is more closely tied to the proximity of supporting agglomeration economies and a diverse economic base.
Health care is a costly industry with high premiums due to its highly skilled workers, its advanced medical technology, and the complex organization of information and collaboration within the medical systems. These high costs require large amounts of capital flows and many forms of financing. As a result, cities that host a large share of health care companies must have a sound financial infrastructure. Likewise, health care must have a strong professional services sector that includes law firms and insurance companies in order to support the highly intricate legalities and premiums associated with health care treatment.
III. Health Care Industry Nashville: Scope and Trend
Why is Health Care important to Nashville?
Health care is Nashville’s largest economic sector, with an overall economic benefit of nearly $30 billion and more than 200,000 jobs to the local economy annually . More than 56 health care companies have chosen Nashville as their head quarters. Within the Davidson County- Nashville area, Health care represents 17.48% of the total jobs. When compared to similar cities , Davidson County-Nashville ranks the highest for the proportion of the workforce in health care and social services. This proportion has continued to grow by 4.3% since 1998 levels (See Figure 1-1). According to the US Census bureau, Davidson county has increased health care and social assistance employment by over fourteen thousand jobs from 1998 to 2010, representing a 17.8% increase (See Appendix 1-1). These employment figures represent significant percentages of the work force that should be investigated for proper city planning and public policy measures.
On the other hand, Williamson, Texas had a 113.7% increase in health care and social assistance employment by over six thousand jobs from 1998 to 2010. The growth in this sector relative to overall employment was only 0.64% (See Appendix figure 4-4). This same trend is seen in other major medical areas such as Santa Clara, California which had a 31.9% increase in the number of people employed and Wake, North Carolina which also had a significant increase of 58.4%. The large increase in employment in these two states relative to the entire work force is smaller than that of Davidson’s County increase. They have growth rates of 3.23% and 2.78% respectively.
These numbers show that Nashville is retaining a large portion of its health care employees. The specialization occurring in this cluster benefits the whole economy as cost of production may decline with this increased competition. The cluster of multiple firms that are competitors are beneficial to the industry as a whole because it attracts more suppliers and customers than a single firm can on its own. The basic concept of agglomeration economies helps to explain how urban cities increase in size and population.
In order for health care firms to provide more goods and services they must hire more workers to produce additional output, so the increase in export employment leads to increase in local employment. The average wage for health care occupations is $62,010, which is significantly higher than Nashville’s average annual wage of $39,280. In the Nashville Metropolitan Statistical Area, the health care industry cluster generated $13.4 billion (direct, indirect, and induced) in personal income in 2008, up 59 percent from 2004. When analyzing the industry linkages you see how this increase in the health care industry cluster creates additional personal income in a host of industries outside of health care. For every $1,000 in personal income created in health care an additional $53 in finance, $48 in administrative management, and $46 in retail trade. In addition, there are substantial impacts on real estate ($32), other service ($26) and accommodation ($24).
Why health care growth in Nashville?
One of the primary factors for providing health care services is human capital. Figure 1-2 shows that Nashville, TN has over fifteen colleges and universities within its city limits and four major hospitals. These institutions draw in the intelligence workers necessary to provide a health care workforce. The increase in educated and skilled workers correlates to increases in productivity. This causes competition among employers which drives up wages to match the higher productivity. The high concentration in human capital has a reinforcing effect within the city where higher levels of capital lead to spill overs in knowledge and ideas within the city which generate technological progress. Cities with above-average shares of metropolitan residents with college degrees coincide to above average long run increases in college shares growth.
Most hospitals are located at or near Universities due to their reliance on research and cutting edge technology. As a result the health care industry benefits from agglomeration economies created by the close proximity of hospitals, universities, information technology companies, and medical device manufacturing and maintenance.
In addition, major research universities such as Vanderbilt bring in substantial levels of federal grant money. According to the Blue Ridge Institute for Medical Research, Vanderbilt University ranks 15th in federal grant money among medical research universities, bringing in more than $322 million. The capital inflow from government grants leads to increases in University spending and, consequently, capital deepening within the metropolitan area which increases the productivity and income of workers.
State and local taxes play a significant role in attracting businesses to an area. Low taxes reduce the cost of living which allows workers to retain more earnings. Businesses want to locate in areas with a small business tax burden in order retain more profit. Tennessee has some of the least burdensome personal income and business taxes, ranking 47th and 27th respectively. These low taxes allow workers to retain more disposable income which contributes to increases in quality of life. However, it’s important to recognize that taxes correlate with more public services that improve the quality of life. While Nashville has low taxes, it has a favorable climate and many public services and amenities, such as its famous parks, live entertainment, and public transportation, which adds to the quality of life and increase the standard of living.
Nashville has a unique set of qualities that contribute to its make up of important agglomeration economies important to the health care industry. The specialization towards health care has contributed to Nashville’s urban growth as a result of capital deepening, increases in human capital, technological progress, and the formation of agglomeration economies. These agglomeration economies form within the health care industry due to inputs of labor sharing, pooling, and matching. The cross over of these inputs between industries create urbanization economies and lead to the localization of firms representing many diverse agglomeration economies.
The rise of large urbanization economies lead to increased concentrations in corporate headquarters as a result of functional specialization. Health care companies utilize business services to perform a variety of tasks necessary for business. A high concentration of these business services make it easier and more convenient for health care companies to do business. This draws in even more health care company headquarters, leading to a reinforcing effect that leverages and builds upon existing industry linkages. This effect is observed in Nashville as it is home to more than 56 health care industry cluster headquarters as of 2008 which brings in $64 billion dollars and employs 400,000 people globally. The local economic benefit equals more than $32 billion and 200,000 employees.
The data presented in this report shows that the health care industry is expanding both nationally and within the Davidson County-Nashville area. In order to retain the upward economic growth and protect its role as a leader in health care specialization from growing competition cities such as Williamson, TX and Clevland, OH, Nashville must encourage initiatives and policies that make doing business in health care more attractive and affordable. This means expanding the agglomeration economies that lead to input sharing and knowledge spill overs, and creating an atmosphere where health care can thrive.
Initiatives and policies that support health care growth
An example of one such initiative is the recent unveiling of a state of the art, first of its kind, Medical Convention center. The brainchild of this vision, the Dallas-based Market Center Management Company, is giving Nashville’s existing Convention Center a new look. By creating a 12-story medical mart atop the current structure this will help to attract a variety of business to the health care industry. The structure plans to include permanent manufacturer showrooms, temporary exhibition space, and state-of-the-art conference facilities . The 2 million square foot complex will house custom space for 600 to 1,000 health care companies to show care their services and technology. The center is projected to draw in more than 150,000 visitors annually. The convention center renovation will cost more than $250 million dollars and lead to the creation of more than 2,700 jobs. The multiplier implications for this renovation will lead to sustained growth within Nashville’s health care industry.
Initiatives such as these will bolster the health care industry infrastructure within Nashville, making it the best choice for health care companies to choose as their home. Policy makers should plan for this growth by encouraging public investment in amenities and services, keeping taxes low, and maintaining Nashville’s share as an leader in education and human capital.