Health-Care Reform and the Next Recession

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The greatest risk to the health-care industry, in its current form, may not come from a partial or complete repeal of Obamacare, but from the possibility that the law is entirely legal. The Affordable Care Act, as it's also known, is hardly perfect, but it contains many provisions designed to bring the runaway train of American health-care spending under control. That would be a victory for the American people -- or so you might think.

One risk lurks just behind this discussion, rarely mentioned but critically important. Skyrocketing spending has helped boost the health-care industry's payrolls to all-time highs. Sector employment seems impervious to any sort of market forces, and has thus far been immune to any creative destruction. Real cost controls and technological innovation might finally slow or even reverse the rapid growth in the sector's employment rolls, but as we've seen in prior busts, the fall of a once-hot sector can cause years of pain for the entire country.

Lifting the curtain
I don't want to get bogged down in the specifics of Obamacare's shortcomings today. It's more useful (for the purposes of this article) as a symbol -- the first real effort to control health-care spending in America. Few would argue that cost controls are unnecessary, not when the United States so far outpaces other countries in health-care spending as a percentage of its total output. Over time, that excessive spending has given rise to a similarly massive health-care sector, one that directly employs nearly one out of every nine workers in the United States.


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Source: Federal Reserve Bank of St. Louis and author's calculations.

There were occasional stretches of time when health care didn't significantly increase its share of the total jobs pie, but health-care jobs have not suffered any real decline since tracking began in 1990. As you can see, every economic downturn enabled health care to claim more of the pie, and the sector now commands just under 11% of total U.S. non-farm employment, including both public and private employers.

Health care is still projected to make rapid gains in the years to come. The Bureau of Labor Statistics, or BLS, recently published a list of the 30 occupations expected to see the most gains from now until 2020, and 14 are in health care. There's no shortage of commentary on the bright future of the health-care employee.

Irrational exuberance
Rosy growth projections have thus far held true, but optimistic predictions have a way of falling short. Remember when construction was one of the hottest sectors? The BLS released an employment outlook in 2004, in which it projected that construction-related employment (including extractive jobs such as mining) would increase from a 2004 total of 7.7 million jobs to 8.7 million by 2014. With two years to go, there's virtually no chance that this prediction will come true. The latest BLS statistics show only about 5 million employees in the sector.

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Source: Federal Reserve Bank of St. Louis and author's calculations.
Note: Federal Reserve statistics differ slightly from BLS numbers.

Even the high-tech industry, which has also posted consistent gains over the years, has never quite met its promise. In 1999, BLS estimated that there were 2.6 million people employed in computer-related occupations. Its most recent figure, 3.4 million, is a 30% gain, but the rest of America hasn't stood still. The tech industry never regained the share of American employment it held at the height of the boom.

anImage

Source: Federal Reserve Bank of St. Louis and author's calculations.
Note: Federal Reserve statistics differ slightly from BLS numbers.

It's important to note that each sector has a different right-axis scale, to better depict the change in its share of American employment. But even if we put all these statistics together, and include other major sectors like retail, finance, and the government, none have seen their employment figures grow in the same sustained way. I've indexed some important sectors to their 1990 jobs numbers, so you can better see the change in employment by sector over time.

anImage

Source: Federal Reserve Bank of St. Louis and author's calculations.

Fat, sick, and lazy
The tech sector had its boom and bust at the turn of the century, and you can see the Great Recession's impact on most other fields, but health care has not slowed down at all. If we look far enough using the same straight-line projection, health care could one day be a larger sector, employment-wise, than the government. The rise in spending is only slightly ahead of this employment growth, with total real health-care expenditures approximately doubling between 1990 and 2009.

Many of these new jobs haven't been created in the professions Americans actually need. The United States has fewer physicians per capita than Uzbekistan, Qatar, Moldova, and Cuba, among many others. Canada, the United Kingdom, and Sweden, all hideouts of the socialist-care boogeyman, have more nurses per capita than the United States.

But there's one kind of health-care worker that America has far more of per capita than any other country -- administrators. Administrative overhead eats up a fifth of all excess health-care spending, and Americans pay twice as much for administrative costs as the citizens of the next most-expensive country.

The Affordable Care Act attempts to rein in this bloat. It's an imperfect attempt, but it's better than nothing. If the Act is upheld, that straight line of health-care job growth, buoyed by a huge mass of redundant paper-pushers, might finally turn downward. If it's overturned, long-overdue efforts to make health care more efficient might ultimately have the same effect.

Nothing grows forever
Health care can't keep growing at this rate forever. Over the past decade, gains in American health-care employment have been more than double the rate of elderly population growth, and have outpaced total population growth by an even wider margin. Blaming lifestyle choices or a graying population for the unceasing growth in health-care costs might make sense, but neither captures the full scope of the problem, which is born largely out of a medical culture of for-profit waste and inefficiency.

There are many ways to clean up waste and clamp down on inefficient systems. Electronic medical records championed by Cerner (NAS: CERN) and Quality Systems (NAS: QSII) could go a long way toward streamlining an unnecessarily low-tech recordkeeping process. But that would just be a start.

The five largest health insurers in the United States -- UnitedHealth (NYS: UNH) , WellPoint (NYS: WLP) , Aetna (NYS: AET) , Humana, and Cigna -- collectively employ 224,000 people and serve (assuming there's no overlap) 151 million. The Department of Health and Human Services serves 108 million Medicare and Medicaid recipients with 65,000 employees. When the numbers show that government employees are nearly three times as efficient at managing an insurance program as private enterprise, it tends to undercut any claims to the free market's superiority.

The problem goes deeper than insurers. If all American health-care providers could make do with half the administrators they employ today, such streamlining might put nearly 4 million people out of work. That's just under half of all the jobs lost during the last recession. Streamlining health care would save the country billions, but would also cost many billions in lost wages and safety net payouts to unemployed administrators. Once those jobs are automated away, there's little chance they'll ever return.

I've written extensively about why automation is inevitable for many repetitive jobs, and administrative paper-pushing is an easy target. When those jobs become expendable, those let go have to go elsewhere. As we've seen in the recession's aftermath, many wind up with nowhere to go but to the unemployment office.

Call it an economic Sophie's Choice. On one hand, we streamline our health-care system and lower costs, but at the price of putting millions of health-care employees out of work. On the other hand, costs keep rising, but a vast swath of the populace gets to keep their jobs. No industry has been immune to the forces of automation before, but no other industry is quite like our modern health-care system. Is there a third way forward, or will health care break our economy no matter what we do to fix it?

The article Health-Care Reform and the Next Recession originally appeared on Fool.com.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.The Motley Fool owns shares of WellPoint. Motley Fool newsletter services have recommended buying shares of WellPoint, Quality Systems, and UnitedHealth Group. Motley Fool newsletter services have recommended creating a diagonal call position in UnitedHealth Group. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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