Staff Paper 98.1

January 1998

Connie Bodeen
Ron Shaffer
Center for Community Economic Development,
University of Wisconsin-Extension

The Economic Impact Study of the Health Care Sector in Grant County is a Collaborative Effort Between:

Southwest Wisconsin Area Health Education Center
Grant County Public Health Department
The Grant County Economic Impact Study Steering Committee

The health care sector is a vital part of a rural county economy. Grant County needs to pay close attention to how it consumes health care services for it could be endangering locally available services.

Most people do not think of health care services beyond the critical role they play in meeting the needs of local residents. However, health care services are a substantial economic presence in Grant County. The health care sector affects the economy in much the same way a manufacturing plant does by bringing money in through third party payments; providing jobs and wages to residents; and providing an opportunity to keep health care dollars circulating within the county economy. Health care businesses have an additional impact through the purchases of utility services and cleaning supplies, as well as the payment of property taxes. Just like changes in a manufacturing plant or farm operations, changes in the health sector influence the rest of the Grant County economy.

The Grant County government, in partnership with the Southwest Wisconsin Area Health Education Center, an affiliate of the University of Wisconsin Medical School, has received a Community-Based Economic Development Grant from the Department of Commerce and the Wisconsin Health and Educational Facilities Authority to assess the role that health care plays in the Grant County economy.

The Grant County Economic Impact Assessment has two primary objectives:

• Evaluate and quantify the importance of the health care industry on the economic well-being of Grant County.
• Develop a balanced plan of action that community leaders can use to retain health care dollars in Grant County and improve their local economy.

This paper will focus on the first of these objectives.

What happens in the health care sector is felt throughout the county economy. These effects are captured by measuring the linkages among the various sectors within the economy. Linkages occur as one firm or household buys goods and services from another. For example, a health care firm buys electricity from the local power company. These two firms are linked through this monetary transaction. Similarly, the health care firm is linked to households through the purchase of labor. These two linkages are identified as backwards linkages. They are called backwards linkages because they represent monetary transactions for the purpose of producing a good or service; the power company and the household are suppliers for the health care firm. A forward linkage is a transaction that occurs for final consumption. An example of this would be the linkage between a health care firm and a household when the household purchases a service, like a physical examination. In this instance, the household is a consumer of the health care firm's services. Linkages are measured by the economic multiplier.

Multipliers describe and quantify the relationships, or linkages, among the various firms and households within an economy. Multipliers can describe these relationships using a number of different economic indicators, like industry output, employment and personal income.

When we look at health care and the economy, there are several indicators we can consider. Traditionally, health care services are evaluated by hospital utilization rates, the number of nursing home beds available, or the number of practicing physicians. However, if we are going to compare the health care sector to the rest of the economy, we need to find numbers that are comparable to other sectors. In this study, there are three key indicators with which we are concerned: total revenue, employment, and personal income. By looking at total revenues, we are able to gain some insight about the total economic activity that is occurring within the specific sector as well as how it relates to the total economic activity within the county. Employment refers to the number of jobs in the county. Understanding the distribution of jobs among the various sectors within the county economy gives us a sense of how many people are dependant upon the activity within any particular sector. Personal income is the wages earned from employment within various sectors in the county. It gives us an idea of how much money an employee has to spend on goods and services, like housing, taxes, groceries and health care.

Our primary objective is to describe and quantify the health care sector - its contribution to and impact in the total economy. In order to accomplish this we utilized input-output analysis. Input-output analysis captures all of the linkages involved in the production and consumption of goods and services. These linkages occur both within the county economy as well as outside it (imports and exports). Input-output analysis distinguishes between local and non-local purchases and is able to isolate local purchases so as to better understand how spending is cycled through the local economy. Input-output analysis derives multipliers to explain the relationships between various firms and households. Further, these multipliers are utilized during impact analysis to help explain the effect a change in stimuli, like industry output, affects the economy.

The package that most suited our needs was IMPLANPro (A further discussion of IMPLANPro and Input-Output analysis can be found in Appendix A). IMPLANPro was selected because it allowed more flexibility in terms of available data and modeling capability. It provided a good medium for data manipulation and impact analysis. IMPLANPro works from a set of secondary county-level data, such as total revenues (output), employment, personal income, and a variety of others. IMPLANPro uses 1994 numbers. The data is collected from a number of published sources including the Bureau of Census economic censuses, Bureau of Labor Statistics' employment projections, ES202 employment security data, county business patterns and Regional Economic Information System (REIS) data.

The initial data set provided for Grant County health care employment was modified for this study. Two methods were used to improve the IMPLANPro data set. First, a Grant County Health Care Related Business Survey was conducted. (A copy of the survey can be found in Appendix B.) Survey data was then supplemented with information obtained from interviews with key informants of the Grant County health care sector. Through the survey and follow-up interviews, the 1994 IMPLANPro default numbers were adjusted to more accurately reflect the current trends in county health care employment for all industry components with the exception of "other medical services." Because the "other medical services" contains home health care, coupled with the fact that home health care is a relatively faster growing industry, it is possible that the IMPLANPro default values for this industry are too low.

For the purposes of this study, there are five industry types that comprise the health care sector. They are listed below along with a listing of the associated standard industrial codes (SIC):

1. Doctor and Dentists
   This includes Offices and Clinics of Doctors of Medicine (8010); Offices and Clinics of Dentists (8020); Offices and Clinics of Doctors of Osteopathy (8030); and Offices and Clinics of Other Health Practitioners (8040).



2. Nursing and Protective Care
   This includes Nursing and Personal Care Facilities (8050).



3. Hospitals
   This includes Hospitals (8060).



4. Pharmacies
   This includes Pharmacies and Drug Stores (partial 5900).



5. Other Medical and Health Services
   This includes Medical and Dental Laboratories (8070); Home Health Care Services (8070); and Miscellaneous Health and Allied Services, not elsewhere classified (8090).

The Grant County health care sector has an employment multiplier of 2, meaning that for every one health care job, two jobs are created at the county level: the original health care job and one other job in another sector. Similarly, the total revenue multiplier is 2.3. Therefore, for every $1 of revenue generated by the health care sector, the total county revenues increase by $2.30: the $1 in health care services and an extra $1.30 in other sectors. Finally, the personal income multiplier is 1.8. This means that every one dollar in personal income created by the health care sector generates an additional 80 cents worth of personal income in other sectors as a result of indirect and induced spending by the health care sector.

Table 1 shows the current value of the Grant County health care sector. The first column represents the direct effects of the health care industry, while the second column includes indirect and induced effects as well as the direct effects. By comparing these two columns we can better understand the impact that health care has in the Grant County economy. This same data is displayed as a percent of the county totals in Chart 1.

Chart 1: Value of the Health Care Sector as a Percent of County Totals

Scenarios

The steering committee (Appendix C) was used extensively during the scenario development stage. After a number of discussion about the forces affecting health care services in Grant County, the steering committee agreed to three scenarios: Increased Utilization, Hospital Reduction, and Health Care Provider Retirement. These scenarios are discussed below.

Here again we are concerned with three key indicators: total revenue, employment, and personal income. The data for the scenarios are presented in both numerical tables and stacked bar charts. The numerical tables are fairly straightforward in that they report the predicted change in raw numbers. The stacked bars give us a sense of how the change in revenue or employment is spread throughout the rest of the economy. They display information concerning the interaction between the health care sector and the rest of the economy. As you will see, changes in the health care sector play themselves out extensively in the rest of the economy.

The Increased Utilization scenario poses the following question, "How would a 15 percent increase in utilization of local health care services affect the Grant County economy?" To construct this analysis, it was assumed that any increase in utilization would be represented as an increase in total revenue. Consequently, to measure the effect of a 15 percent increase in the utilization of local health care services, a 15 percent increase in total revenues was introduced into the model. This introduction shocked the model causing demand and consumption changes in all sectors as well as in household consumption. A number of model simulations were conducted to evaluate the effect of a 15 percent increase in utilization.

For the first run, we assumed that total revenues for the entire health care sector would increase by 15 percent. We did not specify where this increase would occur. That is, we did not specify an increase in hospitals or nursing homes, per se. Rather we applied the increase to the entire sector, assuming that each component of the health care sector would experience their proportionate share of the increase. The health care sector generates $62.4 million in total revenues annually. If we assume that utilization of health care services will increase by 15 percent, we would expect to see a 15 percent increase in total revenues, or an additional $9.4 million generated each year by the health care sector alone. However, the increased utilization has a much larger effect. Not only will revenues in the health care sector increase, but every other sector in the economy will feel the ripple effects. Consequently, total county revenue will increase by $17 million. The total effects of the increase in utilization of health care services can be found in Table 2.

In addition to understanding the total effects of the increase, it is also important to understand how these effects are played out in the county economy. For instance, we know that the 15 percent increase had a direct effect of an additional $9.4 million in health care sector total revenue. We also know that the total effect resulted in a $17 million increase in total county revenue. How do we account for the additional $6.6 million? We can see how the increase in total revenue, as well as employment and personal income, is distributed in Chart 2 below. What this chart tells us is that approximately 59 percent of the change in total revenue was felt by the health care sector. We can also see that the F.I.R.E. sector, or financial, insurance and real estate industries, will experience about 10 percent of the increase.

We were also interested in looking as the individual components of the health care sector to see if one type of service had a greater impact on the economy than another. Specifically, we disaggregated the health care sector into pharmacies, physicians, hospitals, nursing homes, and other medical services. A 15 percent utilization increase was assumed by each industry, independent of each other. Again, we increased the total revenues of each disaggregated industry and compared the results. Table 3 shows the total effects of these scenarios. Charts 3 - 5 display the total effects of each scenario relative to each other and to the aggregated health care sector scenario discussed above.

Table 3: Total Effects of Utilization Increase in Disaggregated Health Care Industries

A 15 percent increase in nursing home utilization would have a greater effect on the county economy than a 15 percent increase in physician utilization (Table 3). This is despite the fact that physician revenues, prior to the simulation, are greater than nursing home revenues. Currently, Grant County physicians generate approximately $15 million in total revenue annually compared to $14 million generated by the nursing home industry. Why does a 15 percent increase in nursing home revenue have a larger impact on the county economy than an increase in physician revenues? The answer to this question is found by understanding the relationships between the nursing home and physician industries and the county economy. IMPLANPro is designed to capture all of the linkages between these various industries. Linkages refer to economic activity related to the purchasing and consumption of goods and services. An industry with strong linkages most likely consumes goods and services that are produced locally. An example in the nursing home instance could include the purchase of linen services from a vendor within the county. In addition to purchases made by an industry, linkages also capture the consumption habits of the employees of the industry. These purchases are considered because they are made using the wages obtained from employment in the industry in question. So, when we compare wages in the nursing home industry to wages in the physician industry, we would expect wages to be higher among physicians and their employees. However, because they have higher wages, they have more purchasing options, they can consume a wider variety of goods and services, especially those produced out of the county. Nursing home employees, on the other hand, have a less purchasing power and are therefore more likely to spend most of their income on goods and services produced locally. Consequently, the increase in nursing home utilization will have a larger impact on the county economy because that industry has stronger connections, or linkages, to other industries in the economy.

 

Chart 3: Total County Revenue
Total Effects of a 15 % Utilization Increase

The Hospital Reduction scenario poses the following question: How would the reduction of hospital services affect the Grant County Economy. This scenario emerged from a discussion of the competing Dubuque, Iowa, and Madison, Wisconsin, hospital markets. Grant County is sandwiched in between these two larger markets and is consequently at risk of being impacted by their growing regional expansion. This scenario assumes a 50 percent reduction in total revenue in the hospital sector.

The hospital sector generates $15.6 million annually in total revenues. If we expect a 50 percent reduction in hospital services, and hence total revenues, total hospital revenues will decrease by $7.8 million. The total effect of this decrease is magnified in the total county economy as seen in Table 4 below.

The distribution of these losses is presented in Chart 6. It is interesting to note that while only about 50 percent of the loss in total revenues occurs in the health care sector, it absorbs almost 65 percent of the loss in personal income, and 60 percent of the loss in employment. Note how trade and services are affected, the result of household spending.

Chart 6: Distribution of Hospital Reduction Total Effects

The Health Care Provider Retirement scenario poses the following question: How would the retirement of two physicians and five dentists affect the Grant County economy? This scenario emerged from discussions with the steering committee regarding the age structure of current providers as well as the difficulty of physician recruitment to rural areas. This last point is particularly problematic for the future of rural dentistry. Grant County has almost twice the number of dentists per capita than other comparable Wisconsin counties, yet is about average in term of per capita physicians, despite losing close to half of its primary care providers over the past five years. Upon closer inspection of county dental services, the steering committee recognized that many of the dentists are in semi-retirement and that within the next five to ten years, the county could expect to lose roughly half of the dentists due to retirement. The number of graduates emerging from dental schools across the country has been declining. The result is that we will likely see a shortage of dentists nationally. Since dentists will be in high demand in urban areas, the fear is that rural areas will be at a marked disadvantage in recruiting the few dentists expected to graduate in the near future. Consequently, rural communities are at risk of losing some proportion of their current dental services.

This scenario is different from the two previous scenarios in that it is a change in employment which initially drives the model, opposed to changes in total revenues. To accurately model the effect of provider retirement, we needed to calculate the total number of employees that would be affected by the provider retirement. It was assumed that three support staff were employed per physician and 3.75 support staff per dentist. Consequently, the initial loss of seven health care providers immediately balloons to a loss of 32 jobs before any impact analysis is conducted. Further, it is assumed that all 32 employees would remain in retirement, unemployed, or would leave the county in search of employment. How this loss is played out in the county economy is displayed in Table 5. The distribution of these losses can be found in Chart 7

An alternative assumption applied to the model is that the county economy will only feel 50 percent of this loss, meaning that only 16 jobs are lost instead of 32. Implicit is the assumption that the remaining 16 workers were absorbed by the other health care firms, that the county was able to recruit providers and the employees were retained or that the new recruits brought new support staff to the county to balance out the original loss, or that some of the employees were able to find employment in other sectors in the county. As IMPLANPro is a linear model, the magnitude of the loss will change under this alternative scenario while the distribution remains intact. Therefore, the total effects for this adjustment can be found in Table 6 while the distribution can be found back in Chart 7.

This preceding analysis demonstrates that the health of the Grant County economy depends on the maintenance of a strong health care sector. It is important for local decision makers and residents to understand how their health care decisions effect the total economy in order to make better informed decisions and to be able to plan for the changes in health care service delivery. We have estimated that the heath care industry, with its linkages, accounts for 3,000 jobs in Grant County, 12 percent of the total jobs in the county. Further, we have determined that each new health care job created will create one additional job elsewhere in the county. The converse is also true: for each health care job lost in the county, we would expect to loose one worker from another industry within the county. Additionally, the health care industry generates 13 percent of the total personal income in the county. It generates $60 million of personal income. Again, every dollar of personal income generated directly by health care has an additional effect of creating 80 cents worth of personal income in other industries. Consequently, Grant County officials and residents must understand how their decision to purchase health care services impacts the entire economic structure, not just their local doctor's office.

One can further understand and quantify the importance of the health care industry by examining how changes in health care affect the rest of the economy. This study has demonstrated that if county health care providers are able to increase local utilization by 15 percent, it will generate $17 million dollars in additional revenues, an additional 362 people will be employed, and total personal income will increase by 6.5 million dollars. This suggests that utilization for all local health care services would increase proportionately. Achieving these results would require a strategy that aimed to increase local utilization of doctors and dentists, hospitals, pharmacies, nursing homes, and other medical services alike.

The Economic Impact Study does not offer any insight into why local residents may prefer non-local health care services. However, it does show which industries within the health care sector have the greatest impact on the county economy. The nursing home industry clearly has the greatest singular impact on the county economy, with "other medical services," namely home health care, running a close second. A 15 percent increase in nursing home utilization alone would effectively increase total personal income by $2.5 million and create approximately 140 additional jobs within the county. Similarly, a 15 percent increase in utilization that is concentrated in home health care services could add approximately 110 new jobs to the local economy and increase personal income by about $2 million. These two industries demand further attention. This is especially true in light of the activities surrounding the changing role of local hospitals.

There is no question that the local hospitals are threatened by the regional aspirations of the Madison and Dubuque markets. This study has determined that a 50 percent reduction in total revenue in the hospital sector alone will have an impact similar in magnitude to the effect of a 15 percent increase in utilization of health care services, only it will have a negative impact. Much of the threat to local hospitals is outside their control. Insurance companies dictate which hospitals local residents can utilize. Even if the local hospitals can influence the insurance companies to be included among the group of contracted hospitals, they are virtually powerless in influencing local employers' health care contract decisions. If the scenario plays out and local hospital services are decreased by 50 percent, a strategy to increase all health care services by 15 percent, as discussed earlier, would only serve to counteract the losses due to the changes occurring within the local hospitals. What this means for Grant County is that local hospitals need to re-examine their role in the county. Local hospitals and the county may both be better served if hospitals expand their services by offering nursing home and home health services. Both of these strategies are currently being employed, to some extent, by the three local hospitals.

Finally, the age structure of the practicing dentists and physicians in the county threatens the future stability of the health care industry. The pending retirement of dentists and physicians negatively impacts employment opportunities for support staff. Additionally, it limits access to locally provided services. It is not realistic to expect remaining dentists and physicians to absorb the patient load or the unemployed support staff generated by retirements. Rather, it is more likely that both patients and support staff will need to search for health care providers and employment out of the county if retirement occurs unchecked. Consequently, efforts to recruit dentists and physicians must be strengthened and increased immediately.

This economic impact study quantifies the impact the health care industry has on the county economy in terms of jobs, revenue and personal income. Further, it attempts to explain the importance of health care related activity to the total economy by examining how changes in the health care industry affects the entire economy. This study represents a first step in the attempt to raise awareness about the significance of the health care industry in Grant County. Further steps must be taken to ensure the quality and quantity of locally provided health services as well as to maintain or improve the health of the Grant County economy.

IMPLANPro is a computer modeling software package that utilizes Input-Output analysis. Input-Output analysis is a tool used to understand the numerous economic linkages within an economy.

The modeling capabilities of IMPLANPro allow for impact analysis. That is, it allows one to hypothesize about future economic conditions, change the appropriate factors in the economy, such as decreasing employment, and evaluate how they will be played out in the entire economy. Input-Output manages economic factors such as output, employment and personal income. Therefore, these are the factors which can be altered in an impact analysis scenario. Consequently, all hypothetical scenarios that are to be tested with the IMPLANPro software must be translated into these economic factors. This explains why utilization has been treated as output, or revenues, in both the 15 Percent Utilization Increase and the Hospital Reduction scenarios. Similarly, it is the reason why the impact of a physician or dentist retiring on support staff employment needed to be estimated before conducting the Physician and Dentist Retirement scenario.

The impact analysis will generate new economic multipliers for area. These multipliers report three types of effects as a result of the changes introduced to the model: direct, indirect, and induced effects. The direct effects are simply the changes that occurred within the sector, or industries, that was initially altered. For example, they are the initial effects in the health care sector as a result of increasing revenues in the 15 Percent Utilization Increase scenario. The indirect effects are a result of the health care sector needing to purchase additional goods and services from other industries in order to meet the 15 percent increase in demand of their services. This includes the purchase of additional office and medical supplies. This creates a chain reaction within the economy. The induced effects represent all of the purchasing that occurs within the local economy. Finally, the induced effects capture the changes in household spending. Households will have more personal income to spend on goods and services as a result of new employment within the industries directly and indirectly affected by the initial change introduced to the model. All of these effects taken together are known as the total effects.

Input-Output analysis is demand-driven analysis tool. This means that industries respond directly and indirectly to meet changes in demand. Input-Output analysis is a linear model that is assumed to have constant returns to size. This means that when demand for a good or service increases (decreases), industries respond by increasing (decreasing) production to meet the increased (decreased) need. Additionally, the model assumes that there are no supply constraints and that the production of goods and services is only limited by the demand for them. This is similarly true for changing prices of a good or service. The price change of an input is assumed to have no affect on final output. Further, the commodities required for production are assumed to be fixed. This means that while changes in the economy affect an industries output, the mix of inputs required for production are not changed. For example, if it took six workers and 1 ton of materials to produce 100 units of a product, it will take 12 workers and 2 tons of the same materials to produce 200 units of the product.

Further explanation and discussion about IMPLANPro and Input-Output analysis can be found in:

The Grant County Economic Impact Study Steering Committee is a group of Grant County residents and professionals interested in promoting the local economy by raising the community's awareness of the impact of their local health care choices. Steering committee members include:

Director/Health Officer

Grant County Health Department

Economic Development Planner

SW Regional Planning Commission

Project Assistant

UW-Madison

Dept. of Urban & Regional Planning

Executive Director

SW AHEC

Personnel Specialist

Rayovac

Professor

UW Extension-Platteville

County Board Member

Assistant Manager

Advanced Transformer Co.

Administrator

Boscobel Area Health Care

Director

Center for Business and Social Research

Loras College

Community Resource Dev. Agent

Grant County Extension Office

Pharmacist

President/CEO, SW Health Center

Grant Community Clinic

Executive Director

Grant County Economic Dev. Corp.

(John O'Brien or Tom Engels)

Dean of Health Occupations

Rural Health Specialist

Division of Community Development

Southwest Wisconsin Technical College

Community Development Economist Center for Community Economic. Dev.

UW-Madison Extension

Rural Health Specialist

Division of Community Development

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