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Inpatient to Outpatient: Oregon's Changing Health Care Industry
by Damon Runberg
Published May-19-2014

Employment in most industries follows a general business cycle. The health care industry, on the other hand, is driven more by population change than recession and expansion.

The typical business cycle has peaks and valleys, expansion and contraction, and good times and bad. The ebb and flow of the business cycle is closely tied to the demand for particular goods and services. If supply is greater than demand we see recession, but if demand exceeds supply we see growth or expansion. Many consumer goods and services are discretionary, meaning they are optional and not mandatory for day to day living, such as that new high-definition television, eating out at your favorite sushi spot, or going on a long-awaited vacation to Europe. When money becomes tight consumers cut back on these discretionary expenses. They may stick with their old television for several more years, eat out less, or decide not to go on vacation.

The health care industry is more insulated from this business cycle as many health services are mandatory, rather than discretionary, expenses. During tough times, a consumer might not buy a new pair of skis, but if he breaks his leg skiing, he still needs to see a doctor. Employment in health care is more closely tied to population size than economic conditions or consumer demand. If more people move into the community then there are more folks who need a cast for their broken arm, medicine for that nasty flu bug, or a filing for that painful cavity.

In Oregon, heath care is expanding with the growing population. The Great Recession had little impact on the health care industry, which continued to grow while other industries shed thousands of jobs. However, digging a little deeper, not all components of the health care industry are growing at the same pace. Ambulatory health services, which includes outpatient clinics, is growing rapidly, while hospitals are experiencing stagnation. Due to the rising cost of inpatient hospital services, Oregonians are increasingly utilizing outpatient clinics and primary care physicians for their significant cost savings.

A Continually Expanding Industry
Employment in health care and social assistance is currently trending upward. However, this growth is not new as the industry has been trending up for almost a quarter century. From 1990 to 2013, health care and social assistance employment in Oregon grew from about 114,000 to 208,000, a compound annual growth rate of 2.5 percent. This rate is much faster growth than Oregon's total nonfarm employment at 1.2 percent compound annual growth during the same period.

Although individual health care facilities let workers go or instituted hiring freezes, the industry as a whole was little affected by the Great Recession. From the peak of the economy in 2007 to the depths of the recession in 2010, health care and social assistance actually gained employment, up 7.8 percent. That's compared with a 7.5 percent drop in Oregon's total nonfarm employment during the same period. In fact, of all the state's super sectors or main industries, educational and health services was the only one to show an increase in employment from 2007 to 2010.

Why Does Health Care Continue to Grow?
It seems a bit unusual to see an industry show no significant losses in nearly a quarter century. But as stated earlier, the health industry is relatively insulated from economic recessions as many of the health services provided are mandatory, not discretionary expenses. This explains why there were no significant employment declines during the Great Recession, but fails to answer: Why is the industry growing? The answer is threefold: Oregon's growing population, Oregon's aging population, and increased access to health services.

Demand for health services seems to be closely tied to the size of the population. The vast majority of the variance in health care employment going back to 1990 can be explained by the state's population growth. In other words, as population increases so too does health care and social assistance employment in order to meet the increased demand for these basic services (Graph 1).

An aging population also demands more health care services. As the large baby boomer age cohort moves into their later years in life we are seeing Oregon's population age. According to estimates from Portland State University's Population Research Center, the share of Oregon's population 65 years or older increased from 13 percent in 2003 to 15.4 percent in 2013. Older individuals disproportionally utilize health services, so as we see the population age we can expect a greater demand for health services.

Finally, the number of Oregonians with health insurance is a significant factor in the increasing demand for health services. As access to health insurance expands, so too will the demand for health services, particularly primary care, non-emergency services, and preventative care. Although the Affordable Care Act and Cover Oregon's rollouts are bumpy at best, they will likely lead to continued employment growth in the health care industry to meet this demand due to expanded access to care. The most recent Oregon Health Insurance Survey conducted by the Oregon Health Authority found there were nearly 550,000 Oregonians lacking health insurance when the survey was conducted in 2013. The number of Oregonians without health insurance will likely shrink in the coming years as more individuals sign up through the Oregon Health Plan or the insurance marketplace.

Graph 1
Health care growth is closely tied to changes in Oregon's population
Cost Savings Strategy Transforming Health Care
The narrative changes a bit when we dig a little deeper into the three different components that make up the health care industry. The first of these is ambulatory health care services, which are the traditional outpatient type medical businesses: physicians' offices, dentists, chiropractors, outpatient clinics, and home health services to name a few. The second sub-sector is hospitals, including both medical and surgical facilities, as well as psychiatric and substance abuse hospitals. The final component is nursing and residential care facilities.

Ambulatory health services is the largest sub-sector of the health care industry accounting for 43 percent of the industry employment, followed by hospitals (32%), and nursing and residential care facilities (25%). Although hospitals are not the largest component of the industry they are some of the largest single employers in the state. The average firm size for Oregon's hospitals was around 780 in the fall of 2013.

Most of the growth in the health care industry during the past several years is due to an expansion in ambulatory health care services. These outpatient clinics and offices increased employment by 13 percent or nearly 9,000 new jobs during the past five years. From 2012 to 2013, physicians' offices added the most jobs in the ambulatory health sector (+1,164); while home health services grew the fastest, expanding 12 percent over the year.

Perhaps most surprising is the stagnation seen in the state's hospital employment, with no substantive gains since 2007 (Graph 2). Between 2007 and 2013 hospital employment in Oregon increased by 600 jobs, a growth of only about 1 percent. In fact, hospital employment trended down the past two years.

According to Dan McCarthy, Administrator with Adaugeo Healthcare Solutions which manages and operates numerous outpatient clinics throughout the Pacific Northwest, much of this growth in ambulatory health services is due to an emphasis on preventative health care management. McCarthy stated the expansion of this new sector of preventative health is spurring the development of new information technology solutions and data management. The goal is to track patient care and history in order to "convert trends and data into manageable services to engage patients before chronic disease occurs." Preventative health care is being incentivized due to benefits to the patient, but also due to cost savings. McCarthy emphasized that "hospitals are expensive" so by identifying high risk patients before an emergency situation it is possible to "transition some of these services to outpatient clinics, primary care physicians, and outpatient surgical centers for a considerable cost savings."

Norman Gruber, CEO of Salem Health Hospital, sees the same trend happening across the country. He stated that while Salem Hospital is currently expanding, nationally, employment in hospitals slowed the past several years. In the long run, Salem Hospital is being conservative with their predictions for future growth. Over half of their payments are from Medicare and Medicaid payers. With added uncertainty of federal payments, the hospital does not foresee a large increase in revenue. Gruber also pointed out that demand for inpatient services is also down. "People are not using hospitals as much due to a variety of factors; high deductible health plans are one reason why many are avoiding hospitals today." McCarthy pointed out the same trend, as he has seen "an increasing burden of health care cost placed on the patient rather than employers. Patients are much more conscious of costs and they are asking questions about the cost of services. So in many cases, patients are opting for less expensive outpatient services rather than visiting hospitals."

Graph 2
It's not hospitals bu ambulatory services leading health care's expansion
Majority of Future Growth is in Ambulatory Services
Based on the most recent projections by the Oregon Employment Department, health care is expected to add 38,500 new jobs from 2012 to 2022. These projections continue the trend of expanded ambulatory health care services as it is expected to lead job growth in the industry, adding 19,100 jobs (+26%). During the same period, hospitals are expected to experience slower growth, adding 7,600 jobs (+14%).

Another sector of the health care industry expected to see rapid growth during the next decade is nursing and residential care facilities. The projected growth of 11,800 new jobs (+27%) in these facilities is closely tied to the aging population in Oregon.

Although the health care industry is growing rapidly and has been for more than two decades, it is an industry in transition. Structural changes are occurring within the industry due to political and policy decisions, the rising cost of health care, and the aging population. According to Dan McCarthy, the population is becoming more "actively involved in their own health care" which is sure to drive change in the industry in the coming years. As a greater burden for the cost of health services is placed on the patient, the patient is more likely to act as a consumer and choose care based on cost, benefit, and preference.