By Jim Damicis, Senior Vice President Camoin Associates, and Alexandra Tranmer, Economic Development Specialist Camoin Associates
Conventional thinking about the health care industry in economic development circles dictates that it is an industry bogged down in federal and state bureaucracy, with little room for employment or growth opportunities. Yet, Jim Damicis and Alex Tranmer explore industry and market data to demonstrate the valuable role that health care and related subsectors can have on a community, proving it is a vital component of any economic development strategy.
Introduction
The health care industry1 is diverse, consisting of many subindustries including:
- Hospitals
- Nursing and Residential Care
- Facilities
- Social Assistance
- Ambulatory Health Care Services, outpatient procedures, generally procedures that do not require an overnight stay in a hospital.
Examples include: blood tests, X-rays, or rehabilitation treatment.
Health care and related sectors are often overlooked in economic development. There are several reasons for this. First, they are often seen as “out of one’s” control due to federal and state bureaucracy (laws, regulations, insurance, etc.). Economic developers feel there is little they can do to influence decision-making within the context of economic development, namely supporting investment and jobs. Second, health care is not viewed as an export-intensive industry bringing in wealth from outside local and regional boundaries. Rather, it is seen as distributing money within the local/regional economy serving local residents and workers. Third, except for select science and tech-intensive specialty occupations such as doctors, many of the jobs such as medical technicians and facilities maintenance typically support low to moderate wages. Fourth, the industry outlook for investment and job creation is often distorted by trends occurring in the larger institutions within the industry, primarily hospitals and large health care networks. Driven by technology and regulations, consolidation of existing hospitals and practices has occurred. However, emerging opportunities in new, innovative, small, and niche markets and businesses are simultaneously occurring and can be easily overlooked.
The Far Reaches of Health Care
Taking into account the nuances of health care subsectors, the industry should not be overlooked as a major contributing factor to successful economic development strategies within localities and regions. These industries are important to not only the national economy but to nearly every local and regional economy – large and small, urban, rural, and everything in between. These industries are driving employment and business development, spending within the region, and providing important career ladders for workforce development. They are also often critical components of mixed-used developments and commercial districts blending small and medium medical office, with other uses including retail, housing, personal services, and commercial office. Additionally, the impact of health care and related sectors on local and regional economies goes well beyond businesses, jobs, wages, and direct economic inputs and outputs. The related sectors impact not only productivity, but also improve quality of life, offer support for workers and residents, attract and grow companies and entrepreneurs, and present opportunities for community engagement and volunteerism. The level of access to and quality of health care determines individual wellness and, in turn, the well-being of communities and regions. For all of these reasons, economic developers should remain aware of industry trends and integrate strategies to leverage and grow these sectors into their economic development plans.
So, what are the major trends in health care related to economic development?
Expenditures
Health care and related sectors contribute significantly to economic output in the U.S. and are continuing to rise in importance. According to the latest available data from the CMS2, national health expenditure has increased from 5.2 percent of Gross Domestic Product (GDP) in 1960 to an estimated 17.6 percent in 2015. Total health expenditures in the U.S. are estimated at $3.2 trillion for 2015, after experiencing a compound annual growth rate of 4.3 percent from 2010-2015.3 Health expenditures are forecast to grow at a compound rate of 6.1 percent through 2020, reaching $4.3 trillion.4
Growth is being driven by many factors, including:
- The aging population: The increasing elderly population will require more intense, long-term care for chronic diseases, which will also be compounded by an increase in life expectancy.
- Increased insurance coverage: With the Patient Protection and Affordable
- Care Act (PPACA making care available to more people throughout the country, existing facilities will be faced with more patients to serve.
- Advancement in technologies: New technologies have driven up the overall cost of health care but have also increased treatment availability and options.5
The following table indicates historic and anticipated growth in health expenditure until 2021.
Employment and Occupations6
Health care and related sectors are key industries for driving employment. In 2015, employment in the Health Care and Social Assistance sector in the U.S. totaled nearly 19.3 million jobs, representing 12.4 percent of all jobs in the country. These jobs were contained in 1.4 million establishments across the country. This was the highest level of all the major employment sectors (2-digit NAICS).
Between 2005 and 2015, the Health Care and Social Assistance sector 3.9 million jobs were added, most among all sectors in terms of absolute job growth. This represented a growth rate of 25 percent over the ten-year period. And growth is projected to continue. Between 2015 and 2025 the sector is projected to add another 4.1 million jobs (most among all major sectors), an increase of 21 percent. Additionally, in 2015 there were another 2.5 million jobs in industry sectors closely related to health care including Pharmaceutical and Medicine Manufacturing, Medical Equipment and Supplies Manufacturers, which includes wholesalers, pharmacies and health care stores, testing laboratories, and Research and Development entities.7
Industry subsectors that have experienced the highest growth in terms of absolute numbers include: Individual and Family Services, Home Health Care Services, General Medical and Surgical Hospitals, Offices of Physicians, and Outpatient Care Centers. Individual and Family Services added nearly 1.2 million jobs in the last decade, which vastly outnumbers the next largest gain in jobs, 495,615, in the Home Health Care Services subsector. Employment in these subsectors grew at a much higher rate than jobs in the overall U.S. economy, which added approximately 7.2 million jobs, or an increase of 5 percent.
What does all this growth mean in terms of workforce?
Outpatient services will be a key driver of growth in health care and related sectors in the coming years. Occupations that will experience the highest growth are those that are not based in hospitals but in outpatient care centers and the home.
Personal Care Aides are projected to experience the greatest growth at the 5-digit SOC code occupation level, adding 557,930 jobs, or a 36 percent increase. This will be followed by Registered Nurses, adding 394,569 jobs and Home Health Aides, adding 318,715 jobs.
Out of the top 10 5-digit SOC codes with the highest projected employment growth, Physical Therapists have the highest median hourly earnings, at $39.26/hr. Personal Care Aides have the lowest hourly earnings, at $9.76/hour. With an increased education level, the hourly wage gain is significant, jumping to $31.95/hour for Registered Nurses and $20.46/hour for Licensed Practical and Licensed Vocational Nurses. This jump in earnings demonstrates the importance of career ladders and workforce development opportunities through higher education.
Finally, it is worth noting that most job growth will be in occupations requiring middle skills – which require more than a high school graduation, but less than a four-year degree. This makes health care and related sectors critical to local and regional workforce development as many of the occupations can be accessed with skills and training available at institutions and schools within the region, including community colleges.
Market Trends and Real Estate Demand for Medical Office Buildings (MOBs)
Colliers International, a major U.S-based real estate development firm, reports in their 2015 Medical Office Outlook Report that medical office vacancy rates are at their lowest level since the 2008 recession, and are continuing on a downward trend, as there continues to be strong tenant demand.8 There are several factors contributing to the strong demand for MOBs.
While the full ramifications of the Affordable Care Act cannot be judged yet, the expected increase in patients has driven demand for health care-related real estate. Additionally, the aging population will continue to tax the health care system and force hospitals and their affiliates to expand their square footage if they are to keep up with the demand from the population. The Outpatient Care Centers subsector performed particularly well over the last three years. Outpatient facilities are typically separate from larger hospitals and can be housed in variety of MOBs, further driving demand for real estate. Further contributing to growth in outpatient facilities is both a consolidation of larger companies, while smaller companies are entering into the market. An industry report for a leading market research firm writes:
“Enticed by growing margins and the potential to strike lucrative acquisition deals with larger industry players, new operators will continue to enter the industry in the next five years, pushing the number of companies upward at an annualized rate of 3.6 percent during the period.”9
During the recession, MOBs were more stable than suburban or Central Business District (CBD) commercial office space, due in part to relatively long term leases of 7-10 years. Colliers International, as well as other real estate developers, note that MOBs are becoming more common as investment properties. About 78 percent of MOB sellers and buyers were investors, as opposed to developers or hospitals in 2013. This is more than double the number of investors the previous year.10
Other significant trends in the field of MOBs include: the necessity for flexible space and multi-specialty offices, which has resulted in the overall increasing size of MOBs. Due to technology advances and the growing amount of technological equipment being used in procedures and follow-ups, space must allow for the technology to be used efficiently. Flexible space opens the possibility for adaptability when technology or the needs of the patient change.
While paper records once took up large portions of a doctor’s office, many hospitals and MOBs have gone, or are going digital, so hard copy records are no longer maintained and stored. Although some space may be saved by digital records, the overall size of MOBs is increasing due to a variety of specialties being housed together under one roof. This can increase cost but also operating efficiency, as overhead costs are lower per physician with a larger group, and if a patient needs to visit multiple specialists they do not have to travel to different locations. The Senior Vice President and National Director at Skanska USA, a construction management company specializing in health care says that while he estimates the average MOB used to be 30,000-60,000 sq. ft., today he says the average is closer to 100,000 sq. ft.11
Key Strategy Issues for Economic Developers
Because of its current and projected future impacts on economic, community, and individual health, the health care and related sectors should be an important part of economic development efforts at the local and regional level. While the hospital and service network components of the industry continue to experience consolidation, health care also offers future growth opportunities for medium and small businesses focusing on emerging services and technologies including personal and home-based care and tele-health. Also, by focusing on community health systems and preventive care through an approach that integrates providers and stakeholders in mental, physical, and social health, communities can improve quality of life while leveraging additional business and employment opportunities. Some important approaches for moving forward include:
- Be holistic: Consider economic opportunities within the context of workforce development, community health and wellness, and business development. Partnerships with health care service providers, companies, education and workforce, small business and entrepreneurship entities, health and wellness organizations will be critical.
- Work with both large and small businesses and organizations in health care: Larger health care entities will continue to be in need of workforce; smaller businesses and entrepreneurs will be looking for financing and technical support to enter markets and grow. Companies of all sizes will be in need of office space.
- Assess land use and zoning: Appropriate zoning codes will enable and encourage mixed-use development sites and districts, as well as allow for opportunities in small personal services including home-based occupations. All will play an important part of future demand for real estate in the coming years.
Sources:
1. For analysis of employment and wages, inputs and outputs, it is categorized within the North American Industrial Classification System (NAICS) as Health Care and Social Assistance, NAICS code 62.
2. Centers for Medicare and Medicaid Services’ (CMS) National Health Expenditure Accounts (NHEA).
3. Compound annual interest refers to average annual growth.
4. IBISWorld, Business Environment Report, Total health expenditure, April 2015
5. IBISWorld, Business Environment Report, Total health expenditure, April 2015
6. Source: Calculated by Camoin Associates, based on data from EMSI; QCEW Employees, Non-QCEW Employees & Self-Employed – EMSI 2015.2 Class of Worker; www.www.economicmodeling.com/
7. These industries include the NAICS Codes: 3254, 3391, 4461, 54138, 5417
8.Colliers International, Medical office Highlights, 2015 Outlook, 2015, http://www.colliers.com/-/media/files/marketresearch/unitedstates/2015-market-reports/1HMedicalOffice_d10_FINAL.pdf
9. IBISWorld, Emergency & Other Outpatient Care Centers in the U.S., May 2015
10. JLL, Medical office buildings top investors’ wish lists, , 2013, http://www.us.jll.com/united-states/en-us/Research/medical-office-buildings-top-investors-wish-lists.pdf?9eb409c9-b566-474c-8a69-3431848b3159
11. Ashok Selvam, “Medical office buildings grow in girth”, Modern Healthcare, September 2012 http://www.modernhealthcare.com/article/20120915/MAGAZINE/309159938
About the Authors
Jim Damicis, Senior Vice President
Jim Damicis has more than 25 years of experience in public policy research and analysis to lead decision making. Prior to merging with Camoin Associates, Jim built PolicyOne Research into a leading research and analysis firm in Maine serving private and public clients throughout the Northeast. Jim also worked for the Maine Science and Technology Foundation (MSTF) serving three years as the Director of Research and Policy. Jim brings a holistic, innovative approach to Camoin’s market analysis and planning work. Through his work with the Communities of the Future and World Future Society, he is a national leader in preparing the profession, communities, and regions for an emerging economic future.
Alexandra Tranmer, Economic Development Analyst
Alexandra brings a strong background in social policy research and a passion for community planning to Camoin Associates. Prior to joining the Camoin Associates team, Alexandra lived and worked in Toronto, Ontario, where she was involved in a variety of urban planning projects. Alexandra holds a Master of Science in Planning from the University of Toronto, where she concentrated on social policy analysis, along with creative and cultural planning.
