Hospitals’ impact less than reported

After years of screaming by employers that spiraling health care spending is crimping their profits and forcing them to hold down wages, an economic impact study released last week by Indiana University Health suggests health care spending is an unmitigated blessing to the Indiana economy.

But the amount of money that IU Health actually adds to the Indiana economy is about half as large as the number cited in the study, according to IBJ's analysis of IU Health's financial data.

The economic impact study, conducted by Pittsburgh-based consulting firm Tripp Umbach, says IU Health’s spending pumps $3.6 billion into the Indiana economy every year. As that money swirls around the state, it bumps the total economic contribution up to $6.6 billion.

Add in the Indiana University School of Medicine—which supplies the physicians for key IU Health hospitals—and the total impact is $7.5 billion, according to Tripp Umbach, which has performed similar studies for numerous hospital systems and academic medical centers over the past two decades.

Those figures are based on IU Health’s annual expenditures (about $4 billion) minus money that “leaks” out of the Indiana economy. But Tripp Umbach did not account for the fact that the majority of IU Health’s funding comes from Hoosiers, their employers or the state government.

Spending by Hoosiers on health care is a lot like their spending at grocery stores and gas stations—vital for residents to be able to work, but not necessarily a boon to the state economy since most of the money would have been spent here, anyway.

By contrast, when Eli Lilly and Co. sells medicines all over the country and brings the profits back to Indianapolis, it is putting new money in the Indiana pot.

IU Health does add to Indiana’s economy in two key ways: when it attracts patients and visitors from outside Indiana and also when it receives federal payments from the Medicare and Medicaid programs.

In 2010, IU Health received one quarter of its patient revenue, or $1 billion, from the federal Medicare program, according to its audited financial statements.

Medicaid, the state-federal program for low-income patients, accounted for 7 percent of IU Health’s patient revenue. The federal government pays 73.5 percent of all Medicaid payments in Indiana, so IU Health pulled in another $209 million from the feds.

Also in 2010, IU Health recorded a special $169 million payment from Medicaid because it serves a “disproportionate share” of low-income patients. All that was federal money.

The IU medical school spends $240 million a year on research, most of which is funded by competitive grants from the federal government, charitable foundations or via corporate contracts.

So that’s $1.6 billion in outside money IU Health brings into the state.

IU Health draws 1.2 percent of its patients from outside Indiana. Those patients tend to come for expensive procedures, such as lengthy stays at Riley Hospital for Children or brain surgery at Methodist Hospital. They also often come with non-patient family members. Tripp Umbach estimates those two groups spend nearly $60 million per year on care or visiting expenses.

Finally, IU Health and the medical school are also visited by out-of-state professionals or help to host medical conferences, bringing in numerous visitors each year. Tripp Umbach estimates that generates $210 million a year in spending.

That means IU Health brings a total of $1.8 billion to Indiana every year from out of state. And using the same multiplier Tripp Umbach did puts IU Health’s total economic impact at $3.4 billion.

That’s a huge contribution, but it’s a little more than half the $6.6 billion Tripp Umbach claimed.

Paul Umbach, founder and president of Tripp Umbach, said his firm's analysis was conducted using a “conservative, fresh dollar approach” and that it uses standard methods for economic impact studies. Indeed, Tripp Umbach conducts an annual study for the Association of American Medical Colleges to quantify and rank the economic impacts of the largest U.S. academic medical centers. IU and IU Health ranked No. 20 in its most recent study.

“It does have an impact. These are real jobs,” said Umbach, noting that IU Health employs 27,000 workers around Indiana, paying average wages of $55,000 per year. Also, the IU medical school produces more than 300 new doctors each year, most of whom remain in Indiana. Tripp Umbach has done other studies that estimate that each new doctor has an economic impact of $1.3 million per year.

Umbach also praised IU Health for doing a better job than most academic medical centers at spending its dollars inside its home state. “It has a way, way more profound impact than one of the academic medical centers in, say, New York," he said.

Still, it’s important to remember that most of that impact first came out of Hoosiers’ pockets.