Pittsburgh's Future

How to Get Lower Cost, Higher Quality Healthcare in Southwestern Pennsylvania

2012-05-13T15:23:00.000-04:00

Is it good news that UPMC agreed to extend its contract with Highmark for an extra year?

Did that cause Highmark to file for increases in premiums on many of its insurance policies last week?

If you're confused about who's right and who's wrong and what should be done about healthcare in the Pittsburgh Region, a new report from the national Center for Healthcare Quality and Payment Reform can help. How to Get Lower-Cost, Higher Quality Health Care in Southwestern Pennsylvania explains what's really going on in the healthcare wars, why you're paying too much and getting too little for your health insurance premiums and copays, and what should be done about. Key points in the new report include:

The major cause of high and growing health care costs in the Pittsburgh Region and other parts of the country is the high prices charged by large health systems. (See page 3 for more detail.)
Prices for the same hospital procedures vary by 100% or more between hospitals in the Pittsburgh Region, and the higher-priced hospitals do not have higher quality. (See pages 3-4 and 14-15 for more detail.)
There is no incentive for patients to use lower-cost hospitals for expensive procedures. Highmark does not offer the kind of tiered network product that employers in other regions are using to control costs. (See pages 4-5 for more detail.)
Current healthcare payment systems penalize doctors and hospitals for reducing costs and improving quality. There are better ways to pay for health care, but no health plans in the Pittsburgh Region pay this way, and no health systems in the Pittsburgh Region are offering to be paid differently. (See pages 5-6 for more detail.)
In addition to prices that are higher than necessary, health care costs are high in the Pittsburgh Region because of the over-utilization of hospital services here. The Pittsburgh Region has some of the highest rates of hospitalization, surgery, and emergency room usage of any major region in the country. (See pages 6-7 for more detail.)
The high utilization of healthcare services is not just because the Pittsburgh Region has an older or sicker population. Even after controlling for age and illness, utilization is higher in the Pittsburgh Region than other major regions for both seniors and working-age adults. (See pages 6-7 and 9-10 for more detail.)
The overuse problem is concentrated in hospitals. The Pittsburgh Region has more hospital beds and more hospital employees than other major regions of the country (see pages 8-9 for more detail.) In contrast, the Pittsburgh Region under-invests in primary care, which can help to keep patients well and reduce hospitalizations (see page 8 for more detail.)
Reducing hospital costs doesn’t necessarily mean layoffs. The Pittsburgh Region spends more on hospital equipment and facilities, and less on hospital workers, than other parts of the country. (See page 11 for more detail.) Lower-cost healthcare will require more jobs in primary care offices and home care. (See pages 11-12 for more detail.)
There is relatively little data to determine whether Pittsburgh Region hospitals are providing high-quality care. U.S. News and World Report hospital rankings are based primarily on opinion, not fact, and they give higher rankings to hospitals in the region that have lower quality on objective measures. There is much less information about the quality of hospital care in the Pittsburgh Region than people in other regions have. The limited data available suggest that most hospitals in the region provide equivalent quality care, and some smaller hospitals deliver better care than UPMC. (See pages 12-13 more detail.)
Hospitals provide extremely large discounts to health plans, so if a hospital refuses to contract with a health plan, it could mean that employers or patients could pay 2-4 times as much for care if that hospital is the only place that offers a particular procedure. The best way to prevent this problem is to require hospitals to charge the same amount to everyone. (See pages 14-16 for more detail.)
Increasing competition among health insurance plans in the Pittsburgh Region could increase premiums rather than reduce them. The biggest impact on costs will come from having more competition among hospitals, not health plans. (See pages 16-18 for more detail.)

Is Our Regional Economy Adequately Diversified?

2012-05-06T14:00:00.001-04:00

Financial advisors say that the best way to both preserve and grow your savings is to diversify your investments, i.e., create a balanced portfolio. Putting all of your eggs in one basket is dangerous. The same advice could be applied to a region’s economy. Invest in a range of different industries, and don’t rely on any one sector to create future growth, no matter how good it might look today.

The Pittsburgh Region learned the perils of non-diversification the hard way thirty years ago. In 1981, over 65,000 southwestern Pennsylvanians worked in the primary metals industry (mostly the steel industry), representing 7% of all the jobs and 14% of all worker earnings in the region. By 1983, the region had lost 25,000 of those jobs and over $1 billion in wages and benefits. Because steel was such a big part of the economy here, the ripple effects caused us to lose a total of 70,000 jobs over that two-year period, and because we were more dependent on the steel industry than other regions, Pittsburgh’s economy suffered far more than any other region in the 1980s.

Is our regional economy more diversified today than in 1980?

Although it’s often said that after the 1982 recession, Pittsburgh became a “service economy,” most jobs in every region have always been in the service sector. Today, Pittsburgh is about average compared to other regions in the balance between goods-producing and service sector jobs. In 2011, the Pittsburgh Region had 147,000 jobs in goods-producing sectors, 12.8% of the region’s total jobs. That’s less than places like Cleveland, Milwaukee, and Seattle, where over 15% of jobs are in goods-producing sectors, but more than places like Atlanta, Columbus, or Denver, where fewer than 11% of jobs are outside of the service sector.

Most (88,000) of our goods-producing jobs are in manufacturing, followed by construction (50,000 jobs) and natural resources/mining (8,500 jobs). Although the number of natural resources/mining jobs in the region (which includes natural gas drilling) has nearly doubled over the past five years thanks to the Marcellus Shale, jobs directly related to natural gas are still a very small part (less than 1%) of the region’s economy. However, from a diversification perspective, we now have a higher proportion of jobs in mining and drilling than any other major region of the country except for Houston, which means that our economy is more susceptible to swings in demand for coal and gas than other communities.

It’s also worth noting that although many people say the steel industry is “gone,” Pittsburgh still has more jobs in steel manufacturing today than any major region in the country, and far more than we have in either coal mining or natural gas production. In 2011, the Pittsburgh Region had over 12,000 jobs in primary metals manufacturing, including 7,000 jobs in steel mills, compared to fewer than 4,000 jobs in coal mining and gas drilling combined. Steel jobs are also among the highest-paid jobs in the region, so keeping them here needs to remain an economic development priority.

As for the service sector, more of those jobs in the Pittsburgh Region are coming from private firms than other regions of the country. Only 10.9% of the Pittsburgh Region’s jobs are in federal, state, or local government, the second-lowest percentage among the top 40 regions. That’s partly because many other major cities are state capitals and we’re not, but we also have the third-lowest percentage of jobs in local government (8%) of any major region in the country. (Although we have more units of local government than any other region, collectively they don’t employ more workers.) Given the fiscal challenges facing government today, being less dependent on public sector jobs is a good thing.

At the other end of the spectrum, nearly one-fifth of our private sector jobs are in just three parts of the service sector, and we are far more dependent on them than other regions:

• Health Care. Over 120,000 (10%) of our region’s jobs are in hospitals and doctor’s offices, a higher proportion than the steel industry represented thirty years ago. Most major metropolitan regions are much less dependent on healthcare jobs than we are, including regions with nationally-renowned medical centers. Since there is strong evidence that we’re spending far more on healthcare in Pittsburgh than we should, our high dependency on healthcare has become a weakness, not a strength, for our economy. (See "Reducing Hospital Costs Can Benefit the Region's Economy.")

• Higher Education. We have over 40,000 jobs in colleges, universities, and professional schools, a higher proportion (3.6%) than any major region except for Boston. Although it’s not likely that any of our colleges will pick up and move away, federal and state funding cuts for higher education could make it difficult for those schools to retain all of the jobs they currently have.

• Company Headquarters. Although we are no longer the leading Fortune 500 headquarters city we once were, we still have 37,000 jobs in “management of companies and enterprises,” the third highest percentage (3.2%) among the major regions. Although our high quality of life has helped us attract and retain company headquarters, poor air service, high taxes, or inadequate mass transit could force some companies to consider moving their headquarters elsewhere in the future.

So our economic eggs are still in too few baskets, just different ones than thirty years ago. And just like then, we could suffer if we don’t proactively try to diversify. That doesn’t mean trying to pick any particular industry to grow; for many years, regional leaders here have tried to pick “the” industry that will drive the region’s economy. First it was computer chip design, then biotechnology, then robotics, and now energy. Although all of those efforts created new jobs, none of them had the dramatic results that promoters promised. And that’s a good thing, because our region is stronger precisely because we now have strengths in all of those areas, not just in any one of them.

Instead of trying to pick winners, the best regional economic development strategy is to help all types of businesses create and retain jobs. We need to encourage innovative startup companies no matter what kinds of technology they develop, and we need to have a good business climate, with competitive taxes, sound infrastructure, and an educated workforce, in order to retain and grow the many different types of businesses and jobs that are already located here.

(A version of this post appeared as the "Regional Insights" column in the Sunday, May 6 Pittsburgh Post-Gazette.)

Do We Need More Competition from Health Plans or Hospitals?

2012-04-01T07:45:00.001-04:00

In a typical economic market, the more sellers of a particular product or service there are, the lower prices will be, because the sellers will compete on price in order to attract customers. This has led many people to believe that the way to get lower health insurance premiums is to have more health insurance companies competing to sell insurance in our region.

However, it’s not quite as simple as that, because health insurance companies are not only sellers of insurance, they’re also the buyers of our healthcare services. They negotiate with hospitals and physicians to set the prices paid for the services individuals and employers receive when they buy a health insurance policy. The more that health plans have to pay for hospital care, the more a health insurance plan will cost. And simple economic theory tells us that, all else being equal, bigger health insurance plans have more clout to negotiate lower prices for healthcare services than smaller plans do.

Most people experience this every day in retail. Consumers don’t buy goods directly from manufacturers; they buy them from retail stores. Does having more retail stores result in higher or lower prices for consumers? Big retailers like Walmart or Target can usually buy products from manufacturers for a lower price than smaller retail stores can, and so they can sell the products to consumers for less. (You may get better service from the smaller retailer, but it's up to you whether you want lower price or better service.)

If there were only one big retailer, consumers would probably see higher prices, because the monopoly retailer could keep the price discounts for itself in the form of higher profits. But conversely, if there were only small retailers, prices for consumers would probably also be higher, because those retailers couldn’t negotiate large price discounts from manufacturers.

What consumers pay depends not just on the number and size of retailers, but on how much competition there is among manufacturers of the product. For example, if there were only one company that manufactured televisions, it wouldn’t matter how many TV retailers there were or how big they were, because a monopoly television manufacturer could set the price as high as it wanted, and both the retailer and consumer would have to pay more to get a TV.

Just like retailers, health insurance companies sit in between the producers of healthcare services –hospitals and physicians – and the ultimate consumers of those services, i.e., patients. The more health plans there are, the smaller each of them will be, and that means they’ll have to pay higher prices to health providers, particularly if there are big hospital systems in the community that can demand high prices from small health insurance companies. It also likely means the health plans will have higher administrative costs as a percentage of healthcare costs, since smaller health plans will have fewer economies of scale. Both of those things will push insurance premiums up. The only thing that competition among the health plans will reduce is their profits.

On balance, having more health plans will be more likely to increase premiums than to reduce them. Under the federal Affordable Care Act, health plans can only retain 15-20% of their premium revenues for administrative costs and profits; the remaining 80-85% must be spent on health care services and quality improvement activities. Even if greater competition among health plans resulted in, say, a 25% reduction in their administrative costs and profits, that would reduce premiums by at most 5% (i.e., 25% of the maximum 20% of premium that can be spent on non-medical expenses), whereas if bigger health plans could negotiate a 10% larger discount on the prices paid to healthcare providers, that could reduce premiums by 8% or more (10% of the minimum 80% of premium that’s devoted to medical expenses).

In fact, research indicates that having more health plans increases the prices paid for healthcare. For example, a 2010 study by Carnegie Mellon Professor Martin Gaynor and colleagues found that having five health insurers in a region instead of four would increase hospital prices by 7%, and a 2011 study by University of Southern California Professor Glenn Melnick and his colleagues found that hospital prices in markets with more health plan competition were 13% higher than in markets with a small number of large health plans.

It’s important to note that what counts is not the total size of the health insurance company, but how many people it insures in the local region, i.e., its local market share. When large national insurance companies enter a market, they may offer lower premiums than existing health plans, but it’s probably not because they’re getting lower prices from hospitals; it’s more likely that they’re just setting their prices below their costs in order to build their business, and paying for those discounts by charging higher premiums in other regions.

Unfortunately, although having bigger health plans can help businesses and consumers pay lower prices for healthcare services, it can also unintentionally encourage the creation of large, monopoly health systems. Since big health plans can demand bigger price discounts from smaller hospitals and physician practices than from large systems, small providers may be forced to either go out of business or merge with the large systems. This is a problem because of the growing evidence nationally that high healthcare costs are being caused by the high prices demanded by large, consolidated health systems. For example, research by University of California Professor James Robinson found that in markets where there were fewer hospital systems, prices were 13%-25% higher for a range of cardiac and orthopedic procedures.

The solution to high healthcare costs isn’t to change the number or size of health plans. The solution is to completely change the way we pay for health care:

• Hospital systems should be expected to compete on both cost and quality. Instead of secretly negotiating prices with health plans, they should make both their prices and quality measures public, charge the same price to all patients regardless of the type of insurance they have, and offer warranties on their care. For example, the Geisinger Health System in Central Pennsylvania now offers cardiac surgery, maternity care, and a number of other procedures for a single, total price, and they don’t charge extra when errors or complications occur.

• Patients need to take responsibility for comparing hospitals on both their cost and quality, and to pay more if they choose expensive hospitals when other hospitals offer high quality care at a lower cost. For example, Massachusetts Blue Cross Blue Shield is asking patients to pay higher copays when they choose higher-cost hospitals.

What we need from health plans is for them to implement new payment systems and benefit designs that support effective competition by providers and more value-based choice by patients. Instead of trying to get more health plans in the region, employers should be choosing the health plans that will support a rapid transition to higher-quality, lower cost healthcare.

(A version of this post appeared as the "Regional Insights" column in the Sunday, April 1, 2012 Pittsburgh Post-Gazette.)

Price Discrimination in Health Care

2012-03-04T07:23:00.002-05:00

Imagine going to the grocery store and being told that the price you’d pay for food would depend significantly on whether you had a job and where you worked. If you worked for one company, you’d get milk and bread at a price close to what the store paid the wholesaler. If you worked for a different company, you would have to pay 20% or 30% more. If you didn’t have a job at all, you’d have to pay three or four times as much. Same milk and bread, same store, but a different price for different customers.

Bizarre, right? Yes, but that’s exactly the way things work in our health care system. What hospitals “charge” is double, triple, or quadruple what it actually costs them to perform the procedure. But the only people expected to pay those full charges are those who don’t have insurance. In most cases, those are the people who can least afford to pay. If you have insurance, your health plan typically pays only a percentage of the published charge amount, but the discount may be bigger or smaller depending on which health plan you have. Same procedure, same hospital, but a different price depending on where you work.

How big of a discount do hospitals give health plans? That’s a closely guarded secret, but on average in Pennsylvania, hospitals are only paid about one-fourth of what they charge. If you have insurance and you’ve had a procedure performed, you’ll see the discount on your “Explanation of Benefits” (EOB) form, where it lists both the amount that was charged and the “allowed amount,” i.e., the discounted price paid by your health plan.

The difference between what is charged and what is actually paid by those with insurance varies dramatically from hospital to hospital. Several years ago, the Pennsylvania Health Care Cost Containment Council issued a report showing the published charges and the actual payments that hospitals received for heart bypass surgery. In some hospitals, such as Butler Memorial, Excela Westmoreland, Jefferson Regional, and the Medical Center of Beaver, patients without insurance were charged about twice as much as those with insurance. At other hospitals, such as Allegheny General, St. Clair, and Washington Hospital, the charges were about 2.5 to 3 times as much as what insurance plans paid. But at a couple of hospitals -- UPMC Passavant and Presbyterian/Shadyside -- the charges were quadruple what the hospitals were actually paid by insurers. However, even though the UPMC hospitals gave bigger “discounts” than the other hospitals, the average amounts they were actually paid were still higher because their charges were so much higher than the other hospitals; i.e., regardless of whether you had insurance or not, the cost of treatment was higher at those hospitals than at most of the others.

If you have health insurance, does any of this matter to you? After all, most people with insurance just pay a copayment or coinsurance regardless of where they go; the rest of the payment is up to your health plan and the hospital to work out.

It will start to matter if you find that your preferred doctor or hospital is no longer in the “network” of your health plan. When you go to an “out of network” hospital, you can face having to pay those full hospital charges with no discount, just as if you had no insurance at all.

In most cases, a hospital will want to be “in network,” because otherwise, most patients couldn’t afford to go there. However, a big, expensive hospital might decide to stay out of a health plan’s network and try to force patients to switch to a health plan that has less negotiating clout so the hospital could get paid higher prices. If a new health plan tells you it has the biggest, most expensive hospitals in its network, there’s a good chance that the plan is paying a lot more for hospital care than if it only included hospitals that offered high-quality care at more reasonable prices. And even if that health plan offers you a low premium now, it might be forced to raise it in the future in order to have enough money to pay those higher prices.

There’s one case, though, where a hospital can’t charge more if it is “out of network.” When a senior citizen with a Medicare Advantage insurance plan goes to a hospital that’s not in the plan’s contracted network, the hospital is required by federal law to accept standard Medicare fees for treating that patient, and those fees are generally significantly lower than what the hospital would be paid if it had a contract with the Medicare Advantage plan. So it’s not surprising to find that a hospital would want to be “in network” for an insurance company’s Medicare Advantage plans (since that would give it higher payments for treating seniors), yet refuse to be in network for the same insurance company’s commercial health plans (so that it wouldn’t have to give big discounts for treating younger individuals).

Not surprisingly, there is growing evidence that this bizarre system of price discrimination and secret discounts is actually making health care less affordable. Both health plans and hospitals try to get bigger and bigger in order to “win” in price negotiations, and it’s the patients and local businesses who are the biggest losers.

Is there a better way? One approach would be to have the government regulate prices, so that hospitals can’t charge someone more based on what type of insurance they have. Maryland does that, and their analyses show their hospital costs are lower than in many other states. However, regulating prices also removes the incentive for hospitals to find innovative ways to deliver care more cost-effectively.

A better approach would be to let hospitals charge whatever they want, but require them to charge everyone the same amount regardless of what kind of insurance they have, and to make their prices public. Instead of being restricted to a narrow network, patients could go wherever they wished for care, but if they chose to go to a higher-priced hospital, they’d have to pay more to do so. That would create pressure on the high priced hospitals to either lower their costs or lose patients to the more affordable high-quality hospitals in town.

Employers and health plans in other parts of the country are doing just this. Rather than restricting where their employees can get care, they’re charging them less for their health insurance if they choose hospitals that deliver high-quality care at a lower cost, or they’re giving the employees a fixed amount of money for a procedure – an amount they know is adequate to get good quality care at reasonably-priced hospitals – and then letting the patient choose which hospital offers the best combination of quality and cost.

Just like sunshine and fresh air can be good for your health, bringing health care prices out in the open and creating a fresh approach to competition could give us better quality, more affordable health care.

(A version of this post appeared as the "Regional Insights" column in the Sunday, March 4, 2012 Pittsburgh Post-Gazette.)

Leading the Nation, But Leaving Many Behind

2012-02-05T06:48:00.002-05:00

Like a rocket suddenly leaving the launch pad after a long countdown, the Pittsburgh Region’s economy surged forward last fall with unprecedented job growth. In September, the region still had 7,000 fewer jobs than before the recession began and over 9,000 fewer jobs than in the year 2000. But just one month later, the exact opposite was true – there were more jobs in the Pittsburgh Region in October than any October in history. We had 14,900 more jobs in October than in September, 23,100 more than a year earlier and 2,500 more than in October 2008 when the recession was just beginning.

This job growth was not just a national wave that Pittsburgh was lucky enough to ride. The Pittsburgh Region actually led the nation in job growth in October with the largest percentage increases in both total jobs and private sector jobs of any major region in the country.

The job surge wasn’t a temporary phenomenon, either. Preliminary figures for December indicate that another 1,400 net new jobs were added between October and December, pushing the region’s job count to the highest level in history. Over the twelve months ending in December 2011, Pittsburgh had the 4th highest rate of job growth of any region in the country.

Which businesses should we thank for this remarkable turnaround?

The total number of jobs always increases in the fall due to a variety of seasonal factors, so you have to look closely to see what’s really going on. Most of the new jobs were created in sectors such as healthcare and higher education where we’ve become accustomed to seeing growth, but we also saw better-than-typical growth in the retail sector.

Our economic success in the fall was also helped by an industry that didn’t add any jobs at all – the leisure and hospitality sector (which includes arts, sports, restaurants, bars, and hotels). Although there were 200 fewer jobs in the leisure and hospitality sector in October than the month before, that’s actually good news because in every other year for the past 20 years, that sector has lost between 1,400 and 4,800 jobs in October due to seasonal layoffs. The leisure and hospitality sector ended the year with more jobs than any December in history, helping to boost regional job totals beyond what they otherwise would have been.

But despite all this good news, there’s also a dark side to the job growth story. Although the total number of jobs in the region is now higher than it was before the recession, that doesn’t mean that we’ve recovered all of the jobs we lost. The strong job growth in sectors such as health care and higher education is masking the fact that over 21,000 jobs that were lost in manufacturing, construction, retail, and the information sector still haven’t returned.

Our manufacturing sector was the hardest hit during the recession, and the recovery there has been weaker than almost any other industry. We lost over 12,000 manufacturing jobs between 2007 and 2009, far more than in any other industry, but since then, only 1,500 net new manufacturing jobs have been created – i.e., seven of every eight manufacturing jobs lost still haven’t come back. Here we lag the nation rather than lead it. While Pittsburgh was #4 in job growth overall last year, it ranked only 26th among the top 40 regions in manufacturing job growth. Cincinnati has restored more than half of the manufacturing jobs it lost, Milwaukee has had more than one-third of its lost manufacturing jobs return, and even Detroit has recovered over a quarter of the manufacturing jobs it lost thanks to stronger manufacturing growth in those regions.

Our construction industry has also not come close to recovering; only 2,000 of the 7,000 jobs lost during the recession have come back. The information industry (newspapers, TV, etc.) has experienced no recovery at all; it lost 1,300 jobs during the recession and another 2,500 jobs since, for a 17.6% loss of jobs over the past 4 years.

This is why, even though the Pittsburgh Region now has more total jobs than any time in history, 27,000 more of our residents are unemployed today than in 2007, before the recession began. Many of those individuals likely worked in businesses such as manufacturing, construction, and retail where the jobs haven’t returned, and are having difficulty finding work because their skills don’t match the needs of the hospitals, research labs, and professional services firms where job growth is occurring.

Can we just ignore the stagnation in manufacturing and other sectors and keep relying on “eds and meds,” with a dash of the Marcellus Shale, to drive our economy in the years ahead?

That would be a dangerous bet. The job growth in both healthcare and higher education has been supported by price increases in those sectors that are well above the rate of inflation, and that can’t continue forever. Although the Pittsburgh Region may see some continued short-run healthcare job growth as Highmark and UPMC gear up to do battle, federal cuts in healthcare payments and demands for lower health insurance premiums mean that healthcare providers cannot continue to expand forever. Job growth in higher education is also likely to slow due to Federal and state budget cuts for both research and scholarships and families’ increasing inability to afford high tuition costs. And the recent plunge in natural gas prices is already cooling the overheated growth in Marcellus Shale drilling, and it may also begin affecting jobs in the coal industry, too.

With that kind of stormy forecast for our current growth sectors, we should redouble our focus on manufacturing rather than writing it off. That means far more than just assembling special tax credits for the occasional opportunity to attract a big new manufacturing plant. We need to help our thousands of existing manufacturing firms expand and encourage entrepreneurs to start new manufacturing firms here by providing access to capital (both business loans and startup investments), adequate infrastructure (particularly industrial sites and transportation systems), and a more competitive tax and regulatory climate. And we need to encourage more high school students to pursue careers in manufacturing so that manufacturing firms can quickly fill jobs when they do create them.

(A version of this post was published as the "Regional Insights" column in the Sunday, February 5, 2012 Pittsburgh Post-Gazette.)

Better Data Would Help Us Get Better Hospital Care

2012-01-01T08:32:00.000-05:00

Depending on how the battle between Highmark and UPMC is resolved, Pittsburghers may have to choose a health insurance plan based on which physicians and hospitals it covers. People in the midst of treatment are understandably frightened about being forced to change doctors or hospitals. But for most people, the challenge will be to decide where they will get the best care for health problems they may develop in the future.

UPMC touts the fact that it’s the only Pittsburgh hospital on the U.S. News and World Report “honor roll” of best hospitals in the country. The West Penn Allegheny Health System (WPAHS) promotes the fact that it’s the only health system designated as a top national performer by Thomson Reuters, and notes that Allegheny General Hospital (AGH) is also recognized by U.S. News and World Report as one of the country’s best hospitals.

Should you use either of these rankings to choose a hospital? Ideally, what you’d like to know is whether a hospital will improve your health rather than worsen it, e.g., how likely you are to die, be injured, or be infected during your hospital stay, or to be readmitted because of complications you experience after discharge. You’d also like to know if the hospital staff will treat you respectfully, respond promptly when you need help, and make sure you’re not in pain.

The U.S. News and World Report “Best Hospitals” list only looks at two outcome measures (patient survival and safety), and gives them relatively low weight. Only 32.5% of a hospital’s score is based on how often patients survive, and a mere 5% is based on patient injury rates. Another 30% is based on “structural measures” like whether the hospital has the latest technology and how many nurses it has. The remaining 32.5% is based on an opinion poll: 200 randomly selected doctors around the country in each specialty are asked to pick the top 5-10 hospitals for “inpatient care for the most complex or difficult conditions [in that specialty].” Patients’ ratings of their experience don’t count at all.

Let’s look at the rankings for cardiac care, since heart problems are the most common reason people are hospitalized. The most recent “Best Hospitals” report shows that AGH performs better than UPMC on patient safety, and that both hospitals performed the same on patient survival. (“UPMC” here means only Presbyterian/Shadyside Hospitals; the other UPMC hospitals are ranked separately and have lower scores.) But UPMC was ranked higher (#20) than AGH (#44) because 5.2% of the cardiologists surveyed listed UPMC as one of the best U.S. hospitals for cardiac care, whereas only 1% put AGH on their list. For U.S. News, that small difference in the opinion poll outweighed the better patient safety scores at AGH. (The #1 hospital was the Cleveland Clinic, which had better patient survival rates than either UPMC or AGH and was chosen as a top hospital by 75% of the physicians surveyed.)

If you’re thinking about a knee or hip replacement, both UPMC Presbyterian/Shadyside and AGH are on the “Best Hospitals” list for orthopedic care. Here, AGH outperformed UPMC on both patient survival and patient safety, but AGH was again ranked lower overall because a smaller percentage of the 200 physicians surveyed nationally picked AGH as a best hospital. The same was true for cancer care, diabetes/endocrinology, gynecology, and other specialties.

The bottom line is that for the most common types of conditions, the limited objective data in the U.S. News rankings give a slight edge to the quality of care at AGH, but also show that neither AGH nor UPMC has outcomes as good as many other hospitals in the country.

Thomson Reuters ranks hospitals based only on objective data, not opinion polls, and uses a broader range of measures of outcomes, care process quality, patient experience, and cost of care. (The patient survival measures used by U.S. News are actually generated by Thomson Reuters.) None of the hospitals in our region made Thomson Reuters’ list of “100 Top Hospitals” in 2011, but AGH made the list of “50 Top Cardiovascular Hospitals,” and WPAHS was ranked in the top 20% on the list of “Top Health Systems.” However, since Thomson Reuters doesn’t make the underlying data public, you can’t easily find out why any hospital did or didn’t make the lists, so they’re not of much value for patients who want to choose a hospital.

A number of quality measures (including many of those used by Thomson Reuters) are publicly available for each of the hospitals in our region on the U.S. Department of Health and Human Services’ Hospital Compare website (www.hospitalcompare.hhs.gov). However, the outcome measures are based only on patients admitted for a heart attack, heart failure, or pneumonia. Although some hospitals in our region have better outcomes than others, most of the differences aren’t big enough to be statistically significant. Once again, though, there are hospitals in other parts of the country with significantly better outcomes than any hospital here.

In sum, the limited data available indicate that you can get good quality care for the most common types of health conditions at both UPMC hospitals and non-UPMC hospitals, but that all hospitals here could deliver much better care than they do today.

We shouldn’t be satisfied with anything less than the best possible healthcare, but today, we don’t have enough data to know whether we’re getting it. People living in places like Iowa, Minnesota, and Wisconsin can access far more data on the quality of hospital care in their communities than we can. They can find out how often patients get blood clots and infections after different kinds of surgery in each of their local hospitals, how often mothers and babies are injured during labor and delivery, and a host of other measures of quality. The reason is their hospitals have made a commitment to measure and publicly report on their performance. And because they publicly report and compare their performance, they are also working hard to improve the quality of care they deliver.

Few people would buy a car without first looking at ratings of the car’s quality and safety. How can we choose hospitals without similar information? And how can hospitals improve if they don’t know how well they’re performing? Pittsburghers should demand that their hospitals publicly report data on the quality of care in a common format, along with the prices of that care. That would enable us to make informed choices about which hospitals to use, and it would encourage our hospitals not just to be good, but to be the best in the nation.

(A version of this post appeared as the "Regional Insights" column in the January 1, 2012 Pittsburgh Post-Gazette.)

Reducing Hospital Costs Can Benefit the Region’s Economy

2011-12-04T07:16:00.001-05:00

Congress is now going back to the drawing board after the Joint Select Committee on Deficit Reduction, commonly known as the “Super Committee,” failed to reach agreement on a plan to reduce the federal deficit. The problem isn’t just partisanship and unwillingness to compromise. Congress can’t control the deficit unless it can find a way to reduce the growth of healthcare costs, since one-half of the projected growth in federal spending over the next decade will come from growth in the Medicare and Medicaid programs.

Healthcare costs are not just a problem for the federal government. High health insurance premiums are increasingly making businesses uncompetitive, and they’re making health insurance less and less affordable for individuals and families.

The biggest driver of healthcare cost increases is hospital care. Over one-third of the growth in national healthcare spending over the past decade has been caused by higher spending on hospital care, far more than spending on either physician services or pharmaceuticals. Any long-term solution to healthcare costs will require that we significantly reduce the growth in spending on hospitals.

Nowhere is this more true than in Pittsburgh. According to American Hospital Association data, Southwestern Pennsylvania has more hospital beds relative to the size of its population than any of the forty largest metropolitan regions in the country. “More” is actually an understatement – the Pittsburgh Region has 50% more hospital beds per capita than the U.S. average, and three times as many beds per capita as Dallas, Detroit, or Seattle.

Not only do we have more hospital beds, we fill them with patients more often than other regions. In 2008, the Pittsburgh Region had the highest rate of hospital admissions per capita among the top 40 regions in the country. We also had the fourth highest rate of emergency room visits and the second highest rate of surgeries per capita of any major region in the country.

The high rate of hospitalization here is not because we have an older population. In fact, if you just compare hospitalization rates among Medicare beneficiaries, you find that the seniors living in Pittsburgh are hospitalized much more often than in other regions. All that hospitalization doesn’t lead to better health, either; it just leads to higher costs. (See Less Health Care Could Be Better For Us.)

But haven’t hospitals been one of the major contributors to our region’s economic growth? Won’t cutting hospital spending mean fewer jobs and higher unemployment?

While it’s true that over the past decade, more jobs have been created in healthcare than any other sector of Pittsburgh’s economy except for professional and business services, those jobs haven’t been created in hospitals. Despite significantly higher spending on hospitals, there are fewer people working in hospitals here today than twenty years ago. All of the healthcare job growth in Pittsburgh over the past two decades has been in ambulatory care services, particularly physicians’ offices.

Hospital spending hasn’t gone up because of higher wages for hospital workers, either. In fact, hospitals in Pittsburgh pay their employees less than hospitals in any other major region. In 2008, average compensation for hospital staff here was 25% below the national average. For example, registered nurses in Pittsburgh had lower average salaries than nurses in 36 of the top 40 regions in the country.

What’s been driving the growth in hospital spending is that hospitals have been building more facilities, buying expensive equipment, and using expensive medical devices and drugs. This is particularly true in Pittsburgh. In 2008, more than 55% of hospital spending here went to non-personnel costs, compared to a national average of less than 49%.

This means that hospital spending in Pittsburgh could be reduced significantly without cutting hospital jobs at all and without harming patients. Hospitals in other parts of the country have found ways to significantly reduce their costs through more efficient scheduling of procedures, better methods of purchasing equipment and medical devices, and eliminating unnecessary expenses. Many of the techniques for doing this were pioneered here in Pittsburgh by the Pittsburgh Regional Health Initiative. Hospital employees could help reduce costs and actually improve the quality of care for patients by learning these techniques and using them more systematically.

Today, however, hospitals are rewarded for the types of equipment they have and how many procedures they do, not for their quality or efficiency. Employers in Pittsburgh need to demand that health insurance plans give patients incentives to choose more efficient hospitals, as employers and health plans in other regions are doing. (See Creating the Right Kind of Competition in Health Care.)

The biggest opportunity to reduce spending on hospitals, though, is by helping people avoid the need for hospital care in the first place. One reason there are more hospital admissions here is that people in other regions are getting better preventive care and care management than we are. For example, thousands of hospital admissions for chronic diseases could be prevented if we made fairly simple, low-cost improvements in our region’s primary care services.

If we do a better job of keeping people well so they don’t need to be hospitalized as often, we’ll need fewer hospital beds and fewer hospital employees. But that doesn’t necessarily mean unemployment for healthcare workers, because helping people stay out of the hospital will require more jobs in primary care, home health agencies, and other ambulatory care services. The healthcare careers of the future will increasingly be in primary care and home care, not in hospitals.

Having fewer hospital beds doesn’t necessarily mean we should have fewer hospitals, either. In fact, if we want to ensure hospital care is delivered as efficiently as possible, we need to have a choice of hospital systems and to make that choice based on both the cost and quality of hospital services.

The bottom line is that reducing spending on hospital care can actually boost the region’s economy, not harm it. Lower health insurance costs will give our families more money to spend, make our businesses more competitive, and create more jobs for everyone. And if we want to attract more businesses and families to Pittsburgh, one of the best ways to do that is to offer lower-cost, higher-quality healthcare than other regions.

(A version of this post appeared as the Regional Insights column in the Sunday, December 4, 2011 Pittsburgh Post-Gazette.)

Reinventing Our Schools

2011-11-06T06:08:00.000-05:00

Tuesday is Election Day, and the most important vote you cast will be for people you almost never hear about: the members of your local School Board.

It’s your most important vote because the performance of our public schools is one of the most important determinants of our region’s economic success.

Businesses won’t create or retain jobs in southwestern Pennsylvania if they can’t find workers that are proficient in basic skills. Although many people think that our region’s workforce strength is determined by how many college graduates we have, the fact is that most jobs, both now and for the foreseeable future, will require a high school-level education and on-the-job training, not a college degree.

Unfortunately, a high school diploma in the Pittsburgh Region doesn’t mean that a student has the basic skills employers expect from a high school education. Pennsylvania State System of School Assessment test scores for 2011 show that over 1/3 (37%) of our 11th graders can’t do math properly and over 1/4 (26%) can’t read adequately. That means that southwestern Pennsylvania schools are sending over 9,000 young people into the workforce every year without the minimum skills they need to get a job, much less go to college.

It’s not just the high schools that are failing. The problem starts all the way back in elementary school. Nearly 30% of the fifth graders in the region can’t read at grade level, and more than 20% aren’t proficient in math.

No business could survive if one-third of its products were defective, and our region can’t be competitive in the global marketplace if a third of our workforce lacks basic skills.

If you think the state tests may be too tough, think again. The National Assessment of Education Progress (NAEP) has found that Pennsylvania’s standard for “proficiency” is only equivalent to what NAEP calls “basic” skills. Under the NAEP standard for proficiency, fewer than 50% of the elementary school students in our region would be considered proficient in either reading or math.

You might think that your own local school district is doing well because it proudly told the community it is meeting state standards for “Adequate Yearly Progress,” or “AYP.” But a school can be classified as making “adequate yearly progress” even if 1/3 of its students are not proficient in math and 1/4 are not proficient in reading. In fact, some schools are classified as AYP even if the majority of their students can’t read or write, due to the complex rules by which the state awards AYP status. For example, the Clairton Middle/High School is classified by the state as making “adequate yearly progress” even though 82% of its 11th graders aren’t proficient in math and 63% can’t read properly on state standards.

If we graded schools the way they grade their students, 150 of the 322 elementary schools in the region would get a “D,” “E,” or “F”, and 109 of the 150 high schools would get a “D” or worse. (If you’d like to see your local schools’ grades, go to www.pittsburghfuture.com/schoolgrades.html.)

Are the schools getting better? Some are, but most aren’t. This year, there were more than twice as many elementary schools that had 90% or more of their 5th graders proficient in both reading and math as there were last year (25 vs. 11). That’s great news. But more than half of the elementary schools in the region had worse performance in math, reading, or both in 2011 than in 2010. That’s terrible news. And 62% of the high schools did worse in 2011 than in 2010. Clearly, the majority of schools are going in the wrong direction.

Even if you’re not concerned about how poorly our schools are educating children, you should be concerned about how much of your money schools spend to do it. Schools in the Pittsburgh Region spent an average of $14,000 per child in 2010, more than both the state and national averages. To get that money, they collected over $2.4 billion in local taxes from the residents and businesses of southwestern Pennsylvania. That’s nearly four times as much as our county governments collect, so the people you elect to your school board will have a far bigger impact on your wallet than those you elect as your County Executive or County Commissioners. Moreover, schools in the Pittsburgh Region spend an additional $2.4 billion of your state and federal tax monies on top of what they collect locally.

Although many schools claim they need even more money in order to improve educational performance, the fact is that some of the best performing schools in our region spend significantly below-average amounts of money, including schools that have large numbers of low-income children, so most districts could be spending less while still getting better results than they do today.

Unfortunately, if you go to the polls to try and make a change in the leadership of your school district, you likely won’t have much of a choice. For example, in 19 of the 46 school districts in Allegheny County, there is no competition for any of the seats. In 22, there are more candidates than there are seats, but in most (13) of these, there is just one more candidate than there are seats available (i.e., six candidates for the five seats that are typically open in most districts). In 5 Allegheny County school districts, there are not even enough candidates to fill all the available seats.

It’s not surprising that with little improvement in school performance and little choice about who will lead the schools, the Governor and General Assembly are looking for ways to give parents more choices about which schools their children can go to, including private schools, and to change the way teachers are evaluated. Rather than fighting these efforts, school boards, superintendents, and teacher unions should instead focus their energies on radically reinventing the way their schools function in order to deliver much better performance at much lower costs. And if you’re in a school district where you have a choice about whom to vote for on Tuesday, you can elect the candidates who are committed to making dramatic improvements in the efficiency and effectiveness of the schools.

(A version of this post appeared as the "Regional Insights" column in the Sunday, November 6, 2011 Pittsburgh Post-Gazette.)

Curing Our Ailing Infrastructure

2011-10-02T06:57:00.000-04:00

There’s a part of the Pittsburgh Region that’s getting older and sicker every day, and it’s not our senior citizens. It’s our infrastructure.

Adequate and reliable water lines, sewer systems, stormwater systems, roads, bridges, transit systems, airports, locks and dams, industrial sites and buildings, and many other physical systems are critical if our citizens and businesses are to have clean water to drink, the ability to travel to work, the ability to ship and receive products, etc. Yet many of those systems in southwestern Pennsylvania are either wearing out or unable to deal with demands they were not designed for.

You can see the effects of this in the news on a regular basis. People drowning when storm runoff floods streets. Bridges collapsing or being closed. Tainted drinking water supplies and unhealthy levels of sewage in the rivers. Barges backing up in the rivers due to broken locks.

We’re not alone in having problems with aging and under-capacity infrastructure. It’s a national problem, and it’s particularly bad in older regions in the Northeast and Midwest like ours.

But in many ways, our problems are worse than those in almost any other region. For example, we have one of the worst problems of sewage-contaminated water in the nation due to urban sewage overflows and failing rural septic tanks. And in transportation, not only do we have more bridges than almost any region of the country, over one-fourth of our bridges are structurally deficient, more than double the national average.

But despite the severity and importance of these problems, we’re not aggressively modernizing our infrastructure. At best we’re doing a portion of the needed preventive maintenance and replacing things only after they collapse completely.

Every year that we avoid more fundamental solutions, the problem will just get worse. Thanks to years of deferring the problems, we now have a multi-billion dollar backlog of important projects.

Many people have looked to the federal government to solve our infrastructure problems. Earlier this year, a bipartisan national group called “Building America’s Future” issued yet another call for increased federal investment in infrastructure. But with a $1.2 trillion deficit and challenges paying its $14 trillion in existing debt, it’s unlikely that the federal government will be able to solve the problem. Moreover, any help they provide will not pay 100% of the costs of a project; there will be requirements for local matching funds. Where will that money come from?

Others have looked to state government to solve infrastructure problems, either directly or in partnership with the federal government, but it has historically been unable to keep up with the need. For example, the latest in a long string of state transportation financing commissions completed its work in August, but even if state legislators actually implement its recommendations, it will only address a part of our infrastructure problems, and any new state money will likely require local governments to invest money, too.

The fact is that no federal or state program will provide enough resources to address all of the important infrastructure problems our region faces. So if we want to ensure our highest priority needs are met, our region will need effective ways to choose which projects will be funded and to pay for the costs that aren’t covered by federal and state sources.

Unfortunately, the Pittsburgh region is more poorly organized to do that than most major regions. The uniquely fragmented local government structure in southwestern Pennsylvania means that we have, in effect, over 500 separate highway departments and nearly 1,000 agencies involved with water and sewer management, none of which has the resources to make investments of the magnitude needed to address our multi-billion dollar infrastructure backlog.

Moreover, the failure of any one community to maintain its infrastructure isn’t just a problem for the residents of that community, it’s a regional problem. For example, any contamination in the water you drink likely came from a problem in a different community somewhere upriver. And since 87% of the region’s residents work at a job located in a different municipality than where they live, you’re likely very dependent on how well multiple municipalities maintain their roads and bridges.

Clearly, if we’re going to address our serious, regional infrastructure problems, we need regional financing and priority-setting mechanisms. Although we have a 10-county agency called the Southwestern Pennsylvania Commission or SPC that’s charged with addressing at least some infrastructure issues, it has almost no actual money to allocate. It develops regional transportation plans and prioritizes highway, bridge, and transit projects, but PennDOT still makes the final decision about which projects will be funded, not SPC. Similarly, although a variety of local agencies plan, organize, and prioritize large economic development projects, the decisions about which projects get state funding are made by the state, and those decisions do not always match local priorities.

Why should we raise state taxes and fees to improve infrastructure, only to have to fight to get our fair share back? A better approach would be for the state to delegate the decision-making authority for at least a portion of state funding to those regions that have an effective regional infrastructure planning, decision-making, and financing mechanism in place. The burden will then be on us to create such a regional mechanism in Southwestern Pennsylvania.

If our region is going to be economically competitive in the future, we need to make infrastructure investment and improvement a central part of our economic development strategies, and we need to do it on a multi-county, regional basis. Although issues like whether to save Mellon Arena or build a new museum tend to generate far more passion and excitement than fixing sewers and bridges, a region with recreational amenities but no clean water or functional highways will not be able to keep its jobs or residents for long.

(A version of this post appeared as the "Regional Insights" column in the Sunday, October 2, 2011 Pittsburgh Post-Gazette.)

The Mismatch Between Jobs and Skills in the Recovery

2011-09-04T07:56:00.002-04:00

It’s now been over three years since the national recession began, and although job losses bottomed out two years ago, unemployment remains high, and there are growing concerns that we’re facing a “double-dip” recession.

If you look at the statistics on jobs, the Pittsburgh Region looks like it’s doing pretty well. After losing over 35,000 jobs during the recession (July 2008 – July 2009), the region has added 27,800 jobs over the past two years (July 2009 – July 2011), i.e., we’ve gained back about 80% of the total number of jobs we lost during the recession. Although that’s been a slow recovery, it’s actually better than most regions have done; over the past two years, we’ve had the 9th highest rate of job growth of any of the 40 largest regions in the country. In contrast, seven major regions, including places like Atlanta, Indianapolis, and Kansas City, have continued to lose jobs in each of the last two years.

But if you look at the statistics on unemployment, you see a very different picture. The seasonally adjusted unemployment rate here in July was 7.4%, hardly changed from the 7.6% rate in July 2009 when job losses were near their peak. There are still more than 92,000 southwestern Pennsylvanians who are unemployed, 27,000 more than before the recession started.

If the region has been adding thousands of new jobs, why has unemployment remained so stubbornly high? A major reason is that we have not been creating jobs in the same sectors where we lost them. During the recession, our biggest job losses were in manufacturing (11,600 net jobs lost just in the 12 months between July 2008 and July 2009), in professional and business services (8,900 jobs lost), in construction (6,100 jobs lost), and in retail (3,900 jobs lost). Since then, the professional and business services sector has restored all of the 8,900 jobs it lost, but only 2,100 manufacturing jobs have been added (18% of the total number lost during the recession), only 1,400 retail jobs have been created (36% of the total number lost), and there has been no net gain at all in construction jobs since 2009.

Two of our other sectors lost jobs during the recovery instead of adding them. The information sector (which includes everything from newspapers to telephones) has shed 1,600 jobs over the past two years on top of the 1,000 it lost during the recession, and we have 1,100 fewer government jobs now than we did three years ago.

Most of the job growth we’ve experienced during the recovery has been in a different set of industries, some of which experienced no net loss of jobs at all during the recession. Over the past two years, our health care and social services sector has added 5,800 jobs on top of the 1,500 jobs it created during the recession for total three-year growth of 7,300 jobs; higher education has added 400 jobs on top of the 2,700 jobs it created from 2008 to 2009; and the mining industry has added a total of 2,800 jobs over the past three years. In addition, the leisure and hospitality industry added 3,900 jobs over the past two years, more than replacing the 2,300 it lost in 2009, for net three-year growth of 1,600 jobs.

So if you look just at the construction, government, information, manufacturing, retail trade, and other services sectors, there are still 23,000 fewer jobs here today than there were three years ago. In the total job count for the region, that is offset by the fact that there are 14,000 more jobs in finance, health care and social assistance, higher education, and mining. But most of the jobs in those latter four sectors require special training or experience that most construction, production, and retail workers aren’t likely to have. Consequently, many of the people who lost their jobs during the recession may still be unemployed simply because the kind of work they do hasn’t come back to the region.

To solve this mismatch, our primary focus should be on rebuilding our manufacturing base. We still have almost 10,000 fewer manufacturing jobs than we did just three years ago, a bigger job loss by far than in any other sector. Although it’s good news that we’ve added 1,500 manufacturing jobs over the past year, fourteen other regions have experienced faster growth in manufacturing than we have, and manufacturing jobs have grown twice as fast over the past year in regions like Cincinnati, Milwaukee, Seattle, and St. Louis as they have in Pittsburgh. Even Detroit has regained over 50% of the manufacturing jobs it lost during the recession, while Pittsburgh has recovered fewer than 20%.

Some might argue that we should simply retrain unemployed manufacturing workers for jobs in health care, since that’s where we’ve experienced our largest and most consistent job growth in recent years. However, national and local efforts to control healthcare spending make it unlikely that the healthcare sector will keep creating jobs the way it has in recent years. In fact, because so many of Pittsburgh’s current jobs are in healthcare (the second highest percentage of any region), slower growth in healthcare will have a disproportionately negative impact on our region, making it all the more important to encourage more growth in manufacturing and other industries.

How can we increase the number of manufacturing jobs? By helping manufacturing firms access capital (both business loans and startup investments), developing ready-to-use industrial sites and buildings, encouraging more high school students to pursue manufacturing careers (some of our manufacturers have jobs available but can’t find qualified workers), helping small firms access international markets, and creating a more supportive tax and regulatory climate.

Growth in manufacturing will not only bring money into the region from around the world, it will also help create jobs in the construction industry and other struggling sectors of our economy.

(A version of this post appeared as the Regional Insights column in the Sunday, September 4, 2011 Pittsburgh Post-Gazette.)

Less Healthcare Could Be Better For Us

2011-08-07T08:10:00.006-04:00

The previous post explained how high prices for healthcare services are a major cause of high health insurance costs both in Pittsburgh and other regions. But healthcare costs in the Pittsburgh Region are also high because we hospitalize people more often than any major region in the country.

The most comprehensive national information about utilization of healthcare services comes from Medicare data on senior citizens. In 2007 (the most recent data available), the Dartmouth Atlas of Health Care reported that Medicare beneficiaries in the Pittsburgh Region who had chronic diseases such as asthma, diabetes, emphysema, and heart failure were hospitalized at the highest rate among the 40 major regions in the country. Chronic disease patients here are hospitalized 50% more often than the national average.

Medicare beneficiaries in our region also underwent surgery at the fourth highest rate among the top 40 regions —10% more often than the national average. Pittsburgh seniors had 23% more heart valve replacements, 14% more heart bypass operations, and 8% more back surgeries than seniors in the rest of the country.

This dramatically higher amount of hospital care is not due to people being older or sicker in Pittsburgh than in other regions, and it’s unlikely that Pittsburgh seniors have both weaker hearts and more bad backs than seniors in the rest of the country. In fact, when Dartmouth Atlas researchers adjusted for differences in age, sex, race, and Medicare payment rates across regions, Pittsburgh ranked #1 in the nation in Medicare spending for hospitals and skilled nursing facilities in 2008.

Younger people are also going to the hospital more often here than in other regions. A 2010 study by the actuarial firm Milliman found that for commercially-insured individuals, the Pittsburgh Region had 6% more hospital admissions and 26% more emergency room visits than the national average. We had one of the highest rates of emergency room utilization among 33 regions they analyzed.

High rates of hospitalizations, surgeries, and emergency room use are not only expensive, they’re signs that the region’s healthcare systems aren’t functioning efficiently or effectively:

•Many of the chronic disease patients who are being hospitalized today could stay healthier and avoid the need for hospitalization through better primary care and patient support services. A great place to start is by reducing readmissions – Pennsylvania Health Care Cost Containment Council data show that 23% of the chronic disease patients in Pittsburgh who are hospitalized end up back in the hospital in less than a month. These high readmission rates can be significantly reduced; for example, projects organized by the Pittsburgh Regional Health Initiative at UPMC St. Margaret and at Premier Medical Associates showed that improving care for chronic disease patients can reduce readmission rates by 40% or more.

•Although it’s great that we have access to excellent surgeons and hospitals when we need them, national studies have shown that many types of major surgery, such as heart surgery, back surgery, and Cesarean sections, are being performed on many patients who don’t really need them. For example, in our region, a review earlier this year found 200 cases of unnecessary coronary stent implants at Excela Health in Greensburg. Studies have shown that when physicians take time to review all the options with patients, the patients choose surgery far less frequently.

It would be one thing if Pittsburgh residents were healthier as a result of all of this hospital care, but they’re not. Pittsburgh had the 11th highest death rate for Medicare recipients among the top 40 regions, and nearly one out of every 50 people hospitalized in the Pittsburgh Region gets an infection during their hospital stay. National studies have shown that regions with high rates of hospital utilization tend to have worse outcomes for patients.

Our overuse problem primarily occurs in hospitals, not in the rest of the healthcare system. In fact, our region ranks below the national average in spending on physician services for both Medicare beneficiaries and commercially-insured patients. Although we have 12% more hospital beds and 19% more hospital employees per capita than the national average, we have 5% fewer primary care physicians and 3% fewer specialists.

What this means is that in order to reduce our health insurance costs, we’re going to need to stop spending so much on hospitals and invest more in primary care and wellness initiatives.

How can we do that? First, physicians need to take the leadership to reinvent the way healthcare is provided so their patients can stay well and stay out of the hospital, rather than forcing health plans and Medicare to cut fees (which underpays physicians and hospitals for needed care) or to create bureaucratic prior authorization systems (which can delay or deny needed care), or allowing hospitals try and put each other out of business in order to keep filling their own beds. Only physicians, who know their patients and what they really need, can ensure costs are reduced in ways that are actually better for patients.

Second, we need to change the way we pay for health care. Today, doctors and hospitals get paid more when patients are hospitalized more often, rather than being rewarded for keeping patients well. There are better ways to pay for health care that give physicians greater flexibility over the care their patients receive as well as greater accountability for outcomes and costs (you can learn about them at http://www.paymentreform.org/ ), but unfortunately, the health plans in our region have not yet implemented them.

Would reducing the overuse of hospital care hurt the region’s economy? Spending less money on the expensive drugs and medical devices used in hospitals and spending more on primary care could actually boost the local economy by keeping more of the healthcare dollars we do spend inside the region, making our workforce healthier and more productive, putting more dollars into workers’ wallets that they can spend locally, and encouraging new businesses and residents to locate here.

Clearly, creating a higher-quality, lower-cost healthcare system should be one of the region’s highest economic development priorities.

(A version of this post appeared as the Regional Insights column in the Sunday, August 7, 2011 Pittsburgh Post-Gazette.)

Creating the Right Kind of Competition in Healthcare

2011-07-03T08:24:00.005-04:00

The prospect of a “divorce” between the region’s largest health insurer (Highmark) and the region’s largest hospital system (UPMC) has caused concern for many residents of the region. Will they have to switch doctors or change insurance? Many community leaders have called on Highmark and UPMC to settle their differences and return to business as usual.

However, business “as usual” isn’t good enough anymore. The high cost of healthcare is hurting businesses and families, both nationally and in southwestern Pennsylvania. We need to find ways to make health insurance more affordable without denying patients the care they need.

Contrary to popular belief, the reason health insurance costs are increasing is not lack of competition among health plans. There is growing evidence nationally that a major cause of high costs is high prices charged by large health systems.

For example, last year, an investigation by the Massachusetts Attorney General found that some of the larger hospitals and physician groups in that state charged twice as much or more than others for the same services. The higher-priced facilities did not provide higher quality of care, nor were they paid more because they treated more complex patients or had teaching programs. The only explanation was that big hospitals and physician groups had the power to demand and receive higher prices. Moreover, the report found that “price increases, not increases in utilization, caused most of the increases in health care costs during the past few years in Massachusetts.”

Last month, the Massachusetts Division of Health Care Finance and Policy issued a new report with even more detail on price variations. In 2009, some hospitals in Massachusetts were paid an average of $25,000 for knee joint replacements while others were paid an average of only $14,000 for similar cases, a nearly 80% difference. Payments for Cesarean sections ranged from under $5,000 to over $10,000, payments for appendectomies ranged from just over $6,000 to just under $12,000, and there were similar variations for other procedures. There was no correlation at all between cost and quality across a wide range of procedures.

High prices are not just a problem in Massachusetts. The Health Insurance Commissioner in Rhode Island found that large health systems in that state were being paid 50% more than smaller hospitals for the same procedures. The Medicare Payment Advisory Commission (MedPAC) issued a report last month which showed that in many regions of the country, some hospitals and physician groups are paid twice as much or more than others.

In the Pittsburgh Region, the amount that hospitals are paid by health plans is a closely guarded secret, but several years ago, the Pennsylvania Health Care Cost Containment Council (PHC4) revealed what our hospitals are actually paid by commercial health plans. While some hospitals in southwestern Pennsylvania were paid an average of $18,000 to perform heart bypass surgery, others were paid as much as $35,000 for the same procedure. Similarly, payments for heart valve surgery ranged from a low of $24,000 to a high or $54,000. Moreover, the lowest priced hospitals (Jefferson Regional, Butler Memorial, and St. Clair Hospitals) actually had lower mortality and readmission rates (i.e., better quality) than the highest-priced hospitals (UPMC Presbyterian/Shadyside Hospitals, Mercy Hospital (then an independent hospital), and Washington Hospital).

What all of this means is that we could be spending 30%-50% less on hospital care than we are today, without sacrificing quality, if the highest price hospitals would reduce their costs. And since hospital care represents 40% of typical commercial insurance costs, cost reductions there could make health insurance policies 10-20% cheaper than they are today – saving thousands of dollars per year on a typical family health insurance plan.

Tougher negotiations between health plans and hospitals aren’t the answer. Each side just tries to get bigger to gain more leverage, and patients and businesses are the losers. The answer isn’t getting more or different health insurance companies, either.

The problem is the type of health plans insurance companies offer. Under most health insurance plans, hospitals don’t have much incentive to reduce their costs, because it doesn’t matter to patients how much the hospital charges.

For example, suppose you need knee surgery and you have a choice of two high-quality hospitals; Hospital #1 charges $15,000 and Hospital #2 charges $30,000. If you were paying on your own, you’d likely choose Hospital #1. But under a typical individual health plan, you would only be responsible for a 10% co-insurance payment up to an overall annual $1,500 limit on out-of-pocket expense. So it would cost you $1,500 to get your knee replaced at Hospital #1 and $1,500 to have it done at Hospital #2 – exactly the same amount.

It would be no different under a high-deductible plan, because the cost of the surgery is well above most deductibles. You might think twice about whether you need the knee surgery at all, given that it will cost you more than under the low-deductible plan, but once you decide to go for the surgery, it won’t matter to you how much the hospital actually charges.

On the surface, this sounds like a pretty good deal – go wherever you want without regard to cost. The health insurance company, not you, would pay the $15,000 difference if you choose Hospital #2. However, the insurance company has to charge you a higher premium for the privilege of choosing more expensive hospitals without regard to cost. The more members of your health plan who choose higher-cost hospitals, the faster your premiums will increase. Even if you’re healthy and you don’t need a hospital at all, you’re paying to give everyone else the freedom to choose without regard to cost. It would be as if your neighbor decided to buy a Ferrari instead of a Ford, and you had to help them pay for it.

Other regions have different kinds of health plans that give patients more responsibility for choosing hospitals and doctors based on cost as well as quality. For example, Blue Cross Blue Shield of Massachusetts now offers a health plan where members pay less if they choose lower-cost hospitals. Employers in Minnesota created a tiered network plan called Patient Choice where employees pay lower premiums and lower copayments if they choose to get their care from lower-cost health systems.

Not surprisingly, the biggest resistance to these types of health plans comes from large, high-priced health systems, since the plans give consumers an incentive to use hospitals and doctors that offer high-quality care at a lower price. In some regions, large non-profit hospitals have refused to contract with a health insurance company at all if it offers such a health plan. That’s not only anti-competitive behavior, but counter to the mission of a charitable institution.

So instead of going back to the old system where cost doesn’t matter or creating “narrow network” health plans that limit patient choice, Pittsburgh’s health insurance companies and health systems should be creating health plans that (1) give patients full choice of which doctors and hospitals to use, (2) better information about the cost and quality of care that they provide, and (3) greater responsibility for deciding whether a higher-priced provider is worth the extra cost. That would encourage health providers to compete on both cost and quality, resulting in better and more affordable healthcare for the entire region.

(A shorter version of this post appeared as the "Regional Insights" column in the Sunday, July 3, 2011 Pittsburgh Post-Gazette.)

Pittsburgh's Gender Gap in Entrepreneurship

2011-06-05T18:11:00.003-04:00

A previous post described the dismal state of African-American business ownership in the Pittsburgh region based on the results of the 2007 U.S. Economic Census.

Are Pittsburgh’s female entrepreneurs doing any better?

The short answer is “No.”

The Pittsburgh Region ranks dead last among the top 40 regions in the number of women-owned businesses relative to the size of its population, and the number of women-owned businesses here has grown more slowly than in most other regions.

In 2007, there were 48,354 businesses in southwestern Pennsylvania that were owned by women (i.e., women had a 51% or higher ownership stake). Although that’s a lot, it represents only 68 women-owned businesses for every 1,000 women ages 20-64 living in the region, versus an average of 89 in other regions. Compared to places like Charlotte, Columbus, and Detroit, which rank about average on this measure, we have 15,000 fewer women-owned businesses than we should.

In every region, the majority of businesses are owned by men, but an even larger share are owned by men here than elsewhere. In southwestern Pennsylvania, only about one-fourth (26.7%) of all businesses were owned by women in 2007, the second smallest percentage among major regions (only Nashville had a smaller proportion of businesses owned by women). The highest percentage was in Washington, DC, where women own one-third (33.1%) of the businesses.

The Pittsburgh Region has seen significant growth in women-owned businesses over the past decade; there were 8,179 more women-owned businesses here in 2007 than in 1997, a 20% increase. However, that was the third smallest growth among the top 40 regions; the number of women-owned businesses grew three times as fast in other regions. Of course, overall business growth in Pittsburgh was slow compared to other regions during that period, but southwestern Pennsylvania also saw below-average growth in the percentage of businesses that were women-owned compared to other regions.

A bright spot is that although Pittsburgh has fewer women-owned businesses than other regions do, the ones that are here are bigger and employ more workers than those in other regions. In fact, Pittsburgh ranked #1 among the top 40 regions in the country in the proportion of women-owned businesses which had at least one employee. Nearly one in seven (14.8%) women-owned businesses here had employees, compared to only 12% on average elsewhere. (About 75-80% of businesses of all types in every region are sole proprietorships or partnerships with no employees). Also, Pittsburgh’s women-owned businesses had average annual revenues of $181,000; that’s the 10th highest average among the top 40 regions.

What types of businesses do women own in Pittsburgh? Sixty percent of them are in four sectors: health care and social assistance; retail trade; professional services; and “other” services (primarily personal services). Compared to other regions, women owners are under-represented in every sector here except for manufacturing and retail.

You might be surprised to learn that 867 manufacturing firms in our region in 2007 were owned by women (17% of all of our manufacturing firms), and they employed over 4,200 workers. It’s important to note, though, that the region has lost a lot of manufacturing jobs since 2007, and we don’t yet know how women-owned manufacturers fared compared to others.

In total, Pittsburgh’s women-owned firms employed over 63,000 individuals in 2007 (in addition to the owners themselves). However, the average wage for their employees was only $24,953, the third lowest among the top 40 regions; the average wage paid by women-owned businesses in most other regions was more than $30,000. The lower wages here are likely due in part to the fact that so many of our women-owned firms are in lower-wage sectors like social services and retail.

The numbers make a clear case for stronger efforts by regional leaders to encourage women to start businesses and to help women entrepreneurs grow their businesses. Even a small percentage increase in the number of women-owned businesses or in the average number of employees per firm could result in thousands of new jobs for the region.

Fortunately, there are a number of organizations in the region whose mission is to help female entrepreneurs. For example, Chatham University’s Center for Women Entrepreneurship, the University of Pittsburgh’s Center for Women in Business, Seton Hill University’s E-Magnify Women’s Business Center, the Diversity Business Resource Center, the National Association of Women Business Owners, the Women’s Business Network of Southwestern Pennsylvania, and others all have programs specifically directed at women starting or operating a business.

However, the fact that there are so many different organizations and programs could be confusing for women considering becoming entrepreneurs and could result in inefficiencies in the delivery of services. Coordination of services and joint marketing by these programs might enable them to expand their collective impact and help improve Pittsburgh’s rankings compared to other regions.

If you’d like to learn more about the challenges women entrepreneurs have faced and the successes they’ve achieved, you might want to attend The Enterprise Forum’s program on women-owned companies this Wednesday (June 8). More information is available at www.enterpriseforumpittsburgh.com.

(A version of this post appeared as the "Regional Insights" column in the Sunday, June 5, 2011 Pittsburgh Post-Gazette.)

Helping African American Businesses in Pittsburgh

2011-05-01T18:03:00.004-04:00

Hidden behind the many positive rankings of the Pittsburgh Region is the poor economic condition of the region’s African American population. Census data for 2009 show that southwestern Pennsylvania has the highest rate of poverty for working age African Americans of any major region in the country. More than one of every three African Americans (37%) in our region is poor. That’s nearly quadruple the 10% poverty rate among the white population in Pittsburgh, and double the 19-20% poverty rates among African Americans in regions such as Atlanta, Baltimore, Boston, and Charlotte.

As discussed in a previous post, part of the solution to this persistent problem is improving the performance of our public schools and expanding training and assistance programs for African-Americans. But another important element of a comprehensive solution is increasing the number and size of African American-owned businesses. Black-owned businesses help to bring wealth as well as jobs into the black community, and the leaders of these businesses can help to ensure the region’s economic development strategies support all segments of the community.

How is the Pittsburgh Region doing in creating and expanding African American-owned businesses? Some important insights can be gained from the national Survey of Business Owners which was released earlier this year. The Survey was conducted as part of the 2007 Economic Census.

Based on the Census Bureau’s estimates, there were 6,101 African American-owned firms in the Pittsburgh Region in 2007. That’s the 5th smallest number of black-owned firms among the 38 largest metro regions for which statistics are available.

You might expect there to be relatively few African American businesses here simply because of the small size of the region’s African American population. However, if you adjust for that, we look even worse: Pittsburgh ranks dead last among the largest regions in the ratio of the number of black-owned firms to the number of working-age black residents in the region.

Although we have a relatively small number of black-owned businesses, they are, on average, larger than black-owned businesses in other metro areas in terms of both employees and revenues:

Although only 480 (8%) of the 6,101 African American firms in the Pittsburgh Region had any paid employees (the rest were sole proprietorships or partnerships), only eight other regions had a higher proportion of firms with employees.

The African American firms in Pittsburgh had more employees than most regions; on average, the businesses with employees here had an average of 10.7 workers, the 12th highest number among the major regions.

The African American businesses with employees in Pittsburgh had an average of $1.2 million in annual sales/receipts, the 7th highest average revenues among the 38 largest regions for which these data were available.

Our region has African American-owned businesses in a wide range of industries ranging from construction to finance; the largest concentrations of businesses and workers were in the health and social services sector and the hospitality industry.

We have seen some encouraging signs of growth in African American-owned firms over the past decade:

The number of black-owned businesses in our region nearly doubled between 1997 and 2007 (more than 3,000 new firms), although this was a smaller growth rate than in most regions.

The number of businesses that had employees declined by 14% (77 fewer firms), but the total number of employees working for these businesses grew by 27% (nearly 1,100 more jobs).

Average revenues of black-owned businesses in Pittsburgh grew by only 11% over the decade, but that was the 8th highest growth among the largest regions; in most other regions, average revenues of African American businesses decreased.

The African American business community in the Pittsburgh Region is clearly smaller than it could or should be, but the businesses we do have provide a solid base to build on. What can we do to strengthen our region’s black businesses?

First, we should be proactive in providing technical assistance and seed funding to African American entrepreneurs who are trying to start or grow their businesses. We have many organizations and programs designed to help entrepreneurs and startup businesses, such as the Small Business Development Centers and Innovation Works, but they need to measure and report on how effectively they are reaching the African American community, and establish special outreach programs where appropriate.

Unfortunately, the Pittsburgh Region missed an important opportunity to support minority businesses this spring. At the beginning of April, the U.S. Department of Commerce’s Minority Business Development Agency (MBDA) awarded $7.8 million in funding to 27 MBDA Business Centers across the country to assist minority entrepreneurs, including a new center in Cleveland, but Pittsburgh wasn’t included.

Second, majority-owned businesses in the region need to help African American businesses by seeking them out as suppliers and by providing mentoring and other support. The African American Chamber of Commerce provides an excellent way for majority-owned businesses to find the African American businesses which are located in the region. In addition, the Western Pennsylvania Minority Supplier Developer Council operates programs specifically designed to match minority suppliers with other businesses. Businesses who want to help grow the minority business community should attend WPMSDC’s 35th Annual Business Opportunity Fair in Monroeville on May 4 or participate in its other programs.

(A version of this post appeared as the Regional Insights column in the Sunday, May 1, 2011 Pittsburgh Post-Gazette.)

Getting More for Our Money in Education and Health Care

2011-04-06T19:13:00.004-04:00

The recession has forced consumers and businesses to pursue greater value – lower cost and higher quality – in everything they do. With less discretionary income, consumers have had to seek out higher-value products and services. This, in turn, has forced businesses to find more efficient methods of production while maintaining or improving the quality of their products and services.

The public sector is now facing the same kinds of challenges the private sector has faced – how to deliver effective public services with dramatically lower revenues. Facing a $4.1 billion budget deficit – a 14% shortfall –Governor Corbett has proposed significant cuts in many state programs, particularly education.

Although the Governor’s proposal would increase the amount of state tax revenues for K-12 education by nearly a quarter billion dollars (2.6%), the net effect on public schools is a $1.3 billion cut because schools will no longer receive $1.5 billion in federal stimulus funds that Governor Rendell had used to substitute for state funds. Although that sounds like a big cut, it represents less than a 6% reduction in total school spending, just slightly more than the increase which had occurred over the past two years.

Many education advocates would like to see more state funds allocated to offset these cuts, but their energies would be better spent helping schools do what hundreds of manufacturing businesses and other firms have done over the past two years – reinventing themselves to deliver greater value at lower cost.

Pennsylvania’s public school systems are hardly models of efficiency or high value. Public schools in Pennsylvania spend nearly $13,000 per pupil per year, 17% more than the national average. Yet they don’t deliver above-average results; the National Assessment of Education Progress found that fewer than 1/3 of students in Pennsylvania’s schools are proficient in basic skills, barely above the national average, and Pennsylvania high school students have the 9th worst college placement test scores in the country. While it is commonly believed that more spending on education leads to better results, the opposite is true in many cases. Indeed, some of the best performing schools in the Pittsburgh Region spend significantly below-average amounts of money.

A 6% reduction in total school spending would still leave schools spending well above the national average. The quality of education could be preserved or improved if the state revises the funding formula so that poor schools don’t face disproportionately large cuts, and if schools eliminate inefficiencies rather than cutting important programs like kindergarten. Only 75% of current school expenditures are actually used for instruction; the other $5 billion goes to administrative overhead, sports, and other non-instructional programs. In this year’s school board elections, voters should seek out candidates who are committed to make these kinds of changes.

In contrast, it’s harder to justify the Governor’s more than 40% cuts in higher education funding, particularly since Pennsylvania provides less support for higher education than most states. Although our colleges and universities could undoubtedly improve their efficiency, they already deliver higher value than those in most states. For example, Pennsylvania’s higher education institutions have the second highest graduation rates of any state in the country, and its public universities rank 10th in freshmen retention rates. Pennsylvania’s universities are also net importers of young talent into the state.

It will be increasingly hard to find money to avoid these kinds of cuts if we don’t solve what has been one the fundamental drivers of the state budget deficit – rising health care costs. One-fifth of the proposed state budget ($5.2 billion in state funds) is dedicated to the Medicaid program, a 22% increase in just three years, and this will increase in the future as federal health reforms bring more uninsured Pennsylvanians into Medicaid. Millions more in state funds go to provide health insurance for state workers and retirees.

Controlling health care costs doesn’t mean cutting physician fees or denying patients important services. It can be done by delivering higher-value care. A previous post identified maternity care as one major opportunity for higher-value care; others are helping patients with chronic diseases stay well and out of the hospital, and reducing hospital-acquired infections and other complications.

We know how to do these things; indeed, the Pittsburgh Regional Health Initiative has been a national leader in helping physicians and hospitals improve quality and reduce costs. The problem is the way we pay for health care. Today, health plans will pay for a chronic disease patient to be hospitalized, but won’t pay doctors to hire nurse care managers who can help patients stay well. Health plans pay hospitals more when patients get infections and other complications, and often financially penalize them for providing higher-quality care.

Fortunately, there are better ways to pay for health care. Episode-of-care and comprehensive care payment systems give doctors and hospitals more flexibility to deliver the care patients need and reward them for controlling costs and improving patient outcomes. The state, as one of the largest purchasers of healthcare services, should only use health plans that implement these new payment approaches. Consumers and private sector businesses also need to demand these changes.

Let’s use the state budget crisis as a wake-up call to catalyze the creation of higher-value healthcare and education systems. Lower health insurance premiums, lower taxes, and better educated students will help our businesses be more competitive and create new jobs, and put more money in every family’s bank account.

(A version of this post appeared as the Regional Insights column in the Sunday, April 3, 2011 Pittsburgh Post-Gazette.)

Better Maternity Care Can Reduce Healthcare Costs

2011-03-06T07:59:00.004-05:00

Although many people blame federal and state government deficits on wasteful spending, one of the biggest factors driving deficits is rapidly growing health care costs. High healthcare costs not only cause higher government expenditures on Medicare and Medicaid, they also increase the costs of providing health benefits to government employees.

Moreover, during a time when we’re trying to recover from the recession, high and growing healthcare costs make it more expensive for businesses to hire new workers, and big increases in healthcare costs make tight family budgets even tighter.

The good news is that there are many ways to reduce spending on health care that actually benefit patients. For example, preventing the thousands of hospital-acquired infections that occur every year in our region would not only save millions of dollars but save hundreds of lives.

One of the biggest opportunities for reducing healthcare costs is improving the quality of maternity care. For most businesses, childbirth and newborn care is the largest or second largest (after heart care) category of hospital expenditures, and it’s by far the largest category of hospital expenditures for state Medicaid programs, so even small improvements can result in large savings.

The place to start is with the most common hospital procedure in America – the Cesarean section. A C-Section is a surgical delivery of a baby, rather than a normal, vaginal delivery. Not only does a C-section typically cost twice as much as a vaginal delivery, it is more likely to result in infections, injuries, and other complications for both mothers and babies.

Yet today, nearly one-third of all babies in the country are delivered by C-Section. Fifteen years ago, only 20% of babies were delivered by C-Section, and in the 1960s, the C-Section rate was under 5%. In southwestern Pennsylvania, rates of C-Sections vary widely. In 2008, the rate of C-Sections for low-risk first-time mothers in Allegheny County was 28.5%, but in Armstrong County it was 36.7%, while in Indiana County, it was only 19.8%.

A major reason that the rate of C-Sections is high and growing is not because they’re necessary, but because they’re convenient. Babies often take longer to arrive than their mothers or doctors might like, and C-Sections often are used to shorten labor or to make babies adapt to the busy schedules that their mothers and doctors have. Yet that temporary convenience can harm both babies and mothers, sometimes permanently.

C-Sections are particularly problematic when they’re used to deliver babies too early. The desire for convenience has resulted in a growing number of cases where doctors use drugs or procedures to induce labor rather than let the pregnancy take its natural course. About one-fourth of deliveries are now electively induced before the baby has reached full term (39 weeks). Yet research has shown that even babies born a few days too early are more likely to have problems such as developmental delays. Moreover, labor inductions before 39 weeks are more likely to result in expensive and risky C-Sections, and the baby is more likely to spend time in an expensive neonatal intensive care unit (NICU).

These unfortunate trends can be reversed. For example, a team of physicians and nurses at Pittsburgh’s Magee Womens Hospital, using “Perfecting Patient Care” training they received from the Pittsburgh Regional Health Initiative, reduced the rate of early elective inductions by 64% and reduced the frequency of C-Sections in elective inductions by 60%. They won the Fine Award from the Jewish Healthcare Foundation in recognition of their cutting-edge work.

There are additional opportunities for even greater savings in maternity care. For example:

•Birth centers are a safe option for healthy women with normal pregnancies who would rather deliver babies outside of a hospital setting, and they typically cost one-fourth as much as a hospital delivery. Pittsburgh is fortunate to have a nationally-accredited, free-standing birth center (The Midwife Center for Birth & Women’s Health) that provides this kind of choice.

•Fewer pregnancy complications and better birth outcomes could be achieved if more women received early and adequate prenatal care. Unfortunately, one in every five mothers (20%) in our region does not get adequate prenatal care, and the rate is shockingly poor in some parts of the region (more than 1/3 of mothers in Fayette, Greene, Indiana, Washington, and Westmoreland Counties did not receive appropriate prenatal care) and for minority populations (1/3 of African American mothers did not receive appropriate prenatal care).

A major contributor to all of these problems is the way health plans and Medicaid typically pay for maternity care. Hospitals are paid more for C-Sections than for vaginal deliveries, creating an incentive to do more C-Sections, and doctors are often paid similar amounts for both types of delivery, even though vaginal deliveries typically take longer and occur at inconvenient times. Doctors and hospitals make more money when mothers and babies have complications or when babies spend time in NICUs, rather than being rewarded for achieving better outcomes and reducing costs.

Some health plans and hospitals are changing this; for example, the Geisinger Health Plan in Central Pennsylvania pays for maternity care based on outcomes, and the Geisinger Health System has significantly reduced C-Sections and improved the quality of maternity care as a result. Health plans in southwestern Pennsylvania should also begin paying for maternity care in ways that enable physicians to deliver higher quality, lower cost care. We’ll not only save money, but have healthier babies and mothers as a result.

(To learn more about strategies for improving the quality and reducing the cost of maternity care, see the 2020 Vision Report and Blueprint for Action from Childbirth Connection, and the presentation on alternative methods of paying for maternity care on their website.

(A version of this post appeared as the Regional Insights column in the Sunday, March 6, 2011 Pittsburgh Post-Gazette.)

Industrial Sites Needed Now for the Manufacturing Jobs of Tomorrow

2011-02-06T06:17:00.002-05:00

Imagine for a moment that the Pittsburgh Region gets some good news early this year – several manufacturing firms are seriously considering building new assembly plants in southwestern Pennsylvania, each of which would employ hundreds of workers with high wages and good benefits. But a few months later it turns out that the celebration was premature – the companies can’t find an industrial site here that will accommodate their plants, and they are forced to take their jobs elsewhere.

Think it couldn’t happen?

Think again. A decade ago, the Pittsburgh Regional Alliance reported that Southwestern Pennsylvania had lost over 4,000 jobs and over $800 million in investment by a dozen manufacturing firms and other business prospects in a two-year period due to a lack of suitable industrial sites.

Why would industrial sites be in such short supply?

The reason is our topography. The same rolling hills and rivers that make Pittsburgh one of the most scenic regions in the country also make it one of the most difficult and expensive in which to develop land, particularly the kind of large flat sites that manufacturing firms and distribution facilities need. Nearly 70% of the land in Southwestern Pennsylvania has a slope greater than 8%, whereas in Columbus, only 200 miles to the west, less than 20% of the land is that steep. Turning land with steep slopes into industrial sites can cost twice as much or more than using land that is flat to begin with.

Because of that, it’s not surprising that virtually all of the limited supply of flat land we have has already been used for something. Even when a site becomes available for reuse, existing facilities have to be demolished, any environmental contamination has to be cleaned up, and the infrastructure has to be modernized, again making it far more expensive than a flat, unused piece of property in another region. And many of the flat sites we have are along the rivers, which we increasingly want to use for recreational amenities.

This is not a new problem for Pittsburgh. Over a half century ago, the Regional Industrial Development Corporation (RIDC) was formed because of a realization that the region didn’t have enough modern industrial sites to support new business growth. Today, two of the three largest industrial parks in the region are here thanks to the efforts of RIDC starting in the 1960s and 1970s.

In fact, planning and development of industrial sites and buildings has to begin years in advance of when they are needed. Many businesses can’t afford to wait for a site or building to be created, so they’ll favor the region with available space that enables their plant to get up and running the fastest.

By the mid-1990s, when manufacturing jobs were growing in the Pittsburgh region, it became increasingly difficult for firms to find suitable, ready-to-go space here. A study done at the time by a national site selection firm found there were only four sites and three buildings in the entire 10-county region that had the potential to be competitive for a major manufacturing facility. Moreover, there were no sites at all that could accommodate very large projects, and no high-quality sites near Pittsburgh International Airport.

The region mobilized to address this growing crisis. The Southwestern Pennsylvania Growth Alliance assembled the first-ever regional priority list of industrial site projects, elected officials and business executives from all 10 counties presented it to Governor Ridge, and over the course of the next 4 years he provided nearly $40 million in grants for industrial site projects in all 10 counties. The counties provided matching funds, and RIDC and county economic development agencies did the hard work of building the necessary infrastructure to create ready-to-use industrial sites and buildings.

How important was this effort? Most of the new and expanded manufacturing and technology plants the region celebrates today are located on industrial sites developed over the past decade using funding provided by the state. For example, Medrad’s medical device manufacturing plant, Flabeg’s solar manufacturing plant, U.S. Steel’s R&D facility, and many Marcellus Shale businesses are located on industrial sites for which planning started over a decade ago.

The good news is that those industrial sites have been filling up with job-creating businesses. The bad news is that as a result, the space available for new firms and expansions is dwindling. Industrial market research from Grubb & Ellis shows that less than 6% of the Class A space in the Pittsburgh region was vacant at the end of 2010. That puts us at a competitive disadvantage with regions like Cleveland, which has three times as much available industrial and R&D/flex space as Pittsburgh.

No municipality or county can address this on its own. Investing in new industrial sites must be a regional effort because the jobs at industrial sites will be filled by the residents of many different municipalities and counties. Moreover, state grant assistance is critical, not only because of the high cost of site preparation and infrastructure, but because the majority of the tax revenues paid by the businesses and employees on the sites will go to the state, not local government.

Although there has been considerable criticism of the large number of Redevelopment Assistance Capital Program grants made by Governor Rendell as he was leaving office, more than one-third of the grants he awarded in Southwestern Pennsylvania were for much-needed industrial site development.

Our region needs more of these kinds of investments if we’re going to grow. RIDC and our county economic development agencies need to continue to plan new industrial site and building projects, and Governor Corbett should continue to provide the state support needed to make them a reality.

(A version of this post appeared as the Regional Insights column in the Sunday, February 6, 2011 Pittsburgh Post-Gazette.)

New Year’s Resolutions to Create a Stronger Region

2011-01-02T07:45:00.005-05:00

As we enter 2011, the shadow of the recession still hangs over the Pittsburgh Region’s economy. Although a surge of job growth last spring restored about 8,000 of the 38,000 jobs lost in 2009 and gave hope for a strong recovery, job growth in the summer and fall was disappointing. As of November, our region still had 26,000 fewer jobs and 40,000 more unemployed workers than in November 2007, the year before the recession started.

News stories about how well Pittsburgh did in the recession have lulled many people into believing that the region’s economy will automatically do well during the recovery. While it’s true we had the 5th smallest loss of jobs among the top 40 regions between 2007 and 2010, that was in large measure because other regions were losing tens of thousands of jobs that we had never created in the first place. Prior to the recession (2003-2007), Pittsburgh had the 5th worst rate of job creation in the country. Indeed, we were one of only 10 large regions which failed to restore all the jobs lost in the 2002 recession before the 2008 recession hit.

This is hardly evidence of a high-performance economic engine we can count on to drive our region in the future. If we repeat the lackluster performance of the past decade, it will be at least 2015 until we get back to the job levels we had in 2001, much less see net growth in jobs.

There are several areas where actions we take in 2011 could determine our future for decades. What should our region’s New Year’s Resolutions be?

Resolution #1: Rebuild Our Manufacturing Sector. Over half of the jobs we lost during the recession were in manufacturing, so manufacturing growth has to be a priority if we’re going to lower unemployment. Contrary to popular belief, the Pittsburgh Region still has more jobs in manufacturing than most of the major regions in the country. And there are hopeful signs of a recovery: 1200 manufacturing jobs were added here in the last six months of 2010, the 10th highest growth rate in the nation.

There are three key ways in which we can support robust job growth in manufacturing to get our economy back on track:

•Provide capital for growth. Banks need to be willing to lend to firms when they have new business opportunities, and investors need to provide early-stage capital to help entrepreneurs start new manufacturing firms.

•Invest in infrastructure. State and local governments need to make the investments in industrial sites, roads, bridges, and water and sewer systems that manufacturing firms need to locate and expand here. This will also create thousands of needed construction jobs.

•Create a well-educated workforce. It does little good for manufacturers to create jobs if they can’t find qualified workers to fill them. See Resolution #3 below.

(For more information about how to grow manufacturing jobs, see Saving Manufacturing in the Pittsburgh Region.)

Resolution #2: Create a Higher-Value Healthcare System. One of our few sources of job growth over the past decade has been the health care sector. As a result, one-tenth of all of the region’s jobs are now in health care, a bigger share of our economy than the steel industry represented 40 years ago.

Unfortunately, all of those jobs and the most advanced healthcare technology in the world haven’t resulted in better health outcomes for Pittsburgh region residents. For example, we have the third highest rate of preventable hospitalizations among the largest regions in the country, and each year, thousands of people who are hospitalized get infections that could have been prevented. Poor quality care is one reason why the cost of health insurance in our region is higher than it needs to be, which in turn makes the region’s businesses less competitive in the global marketplace.

We can’t count on job growth in healthcare to continue at the same pace because we won’t be able to afford the costs involved. Moreover, if our region is going to attract and retain businesses and residents in the future, it will need to offer much higher-quality, more affordable healthcare. To achieve that, health plans need to dramatically change the way they pay for health care, rewarding good outcomes instead of the number of procedures performed, and citizens need to choose doctors and hospitals based on both the quality and cost of the care they provide.

(For more information about how to reform healthcare payment systems to support lower-cost, high-quality healthcare, see Paying for Value in Healthcare, Not Volume.)

Resolution #3: Create a High-Performing Public School System. Although one of our region’s historic strengths has been a high-quality workforce, over one-fourth of the region’s current high school students can’t read adequately and more than one-third aren’t proficient in mathematics.
No business could survive if one-third of its products were defective, and our region won’t succeed in a knowledge-based economy if 30% of our workforce lacks basic skills. Our particularly poor performance in educating African American students is likely a major reason we have the highest rate of poverty among working age African Americans in the nation.

It’s locally-elected school boards that need to be held accountable for this lackluster performance, and in 2011, half of the school board seats in each of our 124 school districts will be up for election. The choices citizens make at the polls this year could have a major impact on both their children and the region’s economy for decades to come. (For more information about the problems with the region's education system and the role of school boards, see Our Children Aren’t Ready for Jobs of the Future).

(A version of this post appeared as the Regional Insights column in the Sunday, January 2 Pittsburgh Post-Gazette.)

Losing Ground Before the Holidays

2010-12-19T18:52:00.002-05:00

The more than 90,000 unemployed workers in the Pittsburgh Region aren’t getting much of a holiday gift from the economy this year. We actually lost private sector jobs in the region between October and November, only the sixth time in the past two decades that private sector jobs declined in November. As a result, the region has now gone over six months without making any significant headway in restoring the more than 26,000 jobs we’ve lost over the past 3 years.

Although there were 1,300 more total jobs in the region in November than in October, that was due to the 1,600 net new jobs in local school districts, one of the largest increases in government jobs from October to November in the past two decades. In contrast, there were 300 fewer private sector jobs in November than October, whereas in many previous years, the economy added between 800 and 4,000 private sector jobs in November. If it hadn’t been for the 2,500 seasonal jobs added in the retail sector (a smaller increase than the typical seasonal growth), things would have been even worse, because the small growth in most other sectors would have been inadequate to offset the loss of 5,000 jobs in construction and in the leisure and hospitality industry (which had a slightly higher loss of jobs than the typical seasonal decrease).

This makes six straight months in which the region has failed to regain any of the ground it lost during the recession. Compared to three years ago (2007), before the recession began, we had 26,100 fewer jobs in November, only 600 better than the same shortfall in May (26,700 jobs). The primary reason that the unemployment rate is lower now than it was in the spring is that fewer people are searching for work, not that unemployed workers have found jobs.

Pittsburgh is not unique in this stagnation. The U.S. as a whole had only 600,000 more jobs in November than it did in May, a long way from restoring the more than 7 million jobs it has lost since November, 2007. However, our region ranked only 26th among the top 40 regions – well below average – in the rate of private sector job growth between May and November.

There’s one bit of good news in this otherwise gloomy report, though. The biggest progress we’ve made in the past six months has been in the place we’ve most needed it – manufacturing. In November, there were 1,200 more manufacturing jobs in the Pittsburgh Region than in May, a 1.4% increase. In fact, we’ve had the 10th fastest growth in manufacturing jobs among the top 40 regions between May and November. We still have 13,900 fewer manufacturing jobs than we did 3 years ago, but the fact that manufacturing has been slowly adding jobs throughout the summer and fall is very good news.

Thank Seniors for Helping Us Get Through the Recession

2010-12-05T08:17:00.003-05:00

The next time you see a senior citizen, thank them for being one of the primary forces supporting our economy through the recent recession. Had it not been for our seniors, unemployment rates in the Pittsburgh Region would likely be much higher today than they actually are.

How have seniors played such a key economic role? More than 1 out of every 6 residents (17.3%) of the Pittsburgh Region is over 65 years old, the largest proportion of any major region in the country. Social Security payments for retired seniors were increased in 2009 while salaries for workers were being reduced or eliminated, and seniors retained generous health benefits through Medicare while many private businesses were reducing health insurance coverage for workers. When our seniors spend their retirement income in stores, in restaurants, on entertainment, etc. they support thousands of jobs in our region, and providing health and personal care services to seniors creates jobs for thousands of additional workers here.

Spending by and for seniors is a big part of our economy. More than one out of every five dollars (21.2%) of personal income in the Pittsburgh Region now comes from “transfer payments,” two-thirds of which are Social Security and Medicare. (Other transfer payments include private pensions, veterans’ benefits, Medicaid payments, and unemployment compensation.)

Due largely to the many seniors who live here, the Pittsburgh region derives more of its income from transfer payments than any other major region in the country. That made a big difference during the recession – while total personal income in most large regions dropped by at least a billion dollars from 2008 to 2009, Pittsburgh was one of only 5 major regions that actually saw a small increase in personal income in 2009. Workplace earnings and investment income in the Pittsburgh region decreased in 2009, so if it hadn’t been for our high and growing level of senior-driven transfer payments, there would likely have been even more job losses here.

On top of that, the extensive medical and personal care benefits provided to seniors helped make health care one of the few economic sectors which actually added jobs in southwestern Pennsylvania during the recession. Many hospitals in our region receive more than half of their revenues from Medicare, most nursing home revenues come from seniors, and at least one-fourth of physician revenues come from Medicare patients.

Although seniors have helped reduce the impact of the recession here compared to other regions, we can’t lean on them too heavily to keep supporting our economy in the future. Seniors are receiving no increase in Social Security benefits for either 2010 or 2011, and private retirement plans have become far less generous than in the past. As a result, it’s likely that a growing number of seniors will be keeping or competing for the jobs that younger workers want.

We also can’t keep relying on the healthcare system as our primary source of new jobs, because we simply can’t afford to keep paying the insurance premiums and taxes that are supporting all of those jobs. A growing number of public and private sector initiatives are being implemented to keep people healthier, provide care in less expensive settings, and improve the quality and efficiency of healthcare services. Although these initiatives will improve the quality of life for both seniors and younger individuals and will help make businesses in other sectors more competitive, they will also result in major changes in both the number and types of jobs in health care.

Thirty years ago, Pittsburgh learned the hard way what happens when a region ignores the fact that its economy is highly concentrated in a single sector, particularly when there are signs that the engines which drove its success in the past are weakening. Today, over 116,000 jobs – one-tenth of all jobs in the Pittsburgh region – are in hospitals, outpatient clinics, and doctors’ offices. That’s both more jobs and a higher share of the region’s total employment than the steel industry represented in the 1970s. Consequently, even a small percentage reduction in healthcare jobs resulting from healthcare reform initiatives could have a significant impact on the region’s unemployment rate.

What should we do?

First, physicians, hospitals, and other healthcare providers need to be far more aggressive about redesigning their operations in order to deliver care as efficiently and effectively as possible. The Pittsburgh Regional Health Initiative (http://www.prhi.org/) has been working with a number of forward-thinking hospitals and physician practices to help them become leaders in the new era of accountable health care, but far more support is needed from health plans, businesses, and government.

Second, we need to focus on encouraging growth in the rest of our economy, particularly manufacturing, which has been the hardest hit during the recession. Creating a more competitive business climate, assisting entrepreneurs, and ensuring our schools produce an educated workforce should be top priorities for state and local leaders in 2011.

(A variant of this post appeared as the Regional Insights column in the Sunday, December 5 Pittsburgh Post-Gazette.)

In the Doldrums

2010-11-27T10:55:00.003-05:00

No news is bad news when you’re hoping for a strong recovery from the recession, and there was essentially no news in the job growth data for Pittsburgh in October. At first glance, the news might appear good, because there were 5,000 more jobs in the region in October compared to September. But jobs always increase from September to October due to seasonal factors, and this year’s September-to-October growth was actually somewhat weak compared to prior years. Indeed, last year, in the depths of the recession, 6,200 jobs were added in the region in October, 20% more than this year.

In fact, throughout the summer of 2010, jobs in the Pittsburgh Region have been growing and declining in a fairly typical seasonal fashion, with no net growth to restore what we lost during the recession. Compared to three years ago (2007), before the recession began, we had 26,500 fewer jobs in October, almost exactly the same shortfall we had in May (26,700 jobs). We need to do better than that – a lot better – if we’re going to help the 90,000 individuals in the region who are still unemployed get back to a more normal life.

The challenge we face is even more starkly demonstrated by comparing job counts today to job counts over a decade ago. In October 2010, we had over 6,000 fewer jobs than in October 1999, and that shortfall has actually gotten worse, rather than better, over the course of 2010.

Over half of the jobs we’ve lost over the past three years have been in manufacturing. That’s a bigger share than most of the major regions in the country, where only a third or fewer of the jobs losses were in manufacturing.

This means that even if our other economic sectors begin growing at above-average rates, it will be years before we can return to pre-recession job levels if we don’t find a way to restore many of the 14,100 manufacturing jobs we’ve lost since October 2007. Moreover, job losses in manufacturing have a disproportionate impact on our economy because they are some of the highest-paid jobs in the region. Consequently, supporting the manufacturing sector needs to be a top priority for the new Administration in Harrisburg as well as for local leaders.

Our Children Aren’t Ready for the Jobs of the Future

2010-11-06T22:35:00.004-04:00

As the nation’s economy struggles to recover from the recession, how is our region doing in preparing children to compete for the jobs of the future?

Not very well, unfortunately. State test scores for 2010 show that over one-fourth (28%) of our 11th graders can’t read adequately and more than one-third (37%) aren’t proficient in mathematics. That means southwestern Pennsylvania schools are sending nearly 10,000 young people into the workforce every year without the minimum skills they need to compete for the jobs of the future.

It’s not just the high schools that are failing. The problem starts all the way back in elementary school. Nearly one-third (32%) of the fifth graders in the region can’t read at grade level, and nearly one-fourth (22%) aren’t proficient in math.

No business could survive if a third of its products were defective. Our region can’t expect to succeed, either, if 30% of our workforce lacks basic skills.

If you think this isn’t a problem in your local schools, think again. Only one high school in the entire region (Upper St. Clair) had 90% or more of its 11th graders proficient in both mathematics and reading, and only 11 of the region’s 319 elementary/middle schools had 90% or more of their 5th graders proficient in both mathematics and reading.

In fact, if we graded schools the way they grade kids, more than half of the elementary schools in the region would get a “D,” “E,” or “F,” and nearly three-fourths of the high schools would get a “D” or worse. (If you’d like to see your local schools’ grades, go to www.pittsburghfuture.com/schoolgrades.html.)

Although news media tend to focus on the Pittsburgh Public Schools because of its size, fewer than 10% of the non-proficient students in the region are from the City of Pittsburgh. Most of the problem is in the other 123 school districts, and we won’t have a competitive workforce unless every school district improves.

The problem is getting worse, not better. Fewer than one-fourth of the elementary schools in the region improved student proficiency in both reading and math between 2009 and 2010, while one-third did worse on both reading and math proficiency.

Wait a minute, though – didn’t the state Department of Education say that most schools were making “adequate yearly progress” (AYP) according to federal standards? Yes, but AYP is not a standard that any school should be proud to achieve. A school can have over a third of its students (37%) failing in reading and nearly half (44%) failing in math and still be labeled as making “adequate yearly progress” under federal standards. (See http://paayp.emetric.net/ for more information.)

As bad as the overall performance of our education system is, it’s far worse for African-American students. In 2010, over half (59%) of the African-American 11th graders couldn’t read adequately, and more than two-thirds (70%) weren’t proficient in math. Here again, this is not just a City of Pittsburgh problem – two-thirds of the non-proficient African American students are in high schools outside of the City of Pittsburgh.

Educators often claim that low proficiency scores should be excused in schools that have large numbers of economically disadvantaged students or disabled children. But in the majority of schools, 25% or more of the non-disadvantaged, non-disabled 5th graders can’t read adequately, and 20% or more aren’t proficient in math.

The problem isn’t lack of money. Some of the best performing schools in the region are in districts that spend below-average amounts. For example, in the Beaver Area School District, more than 90% of the fifth graders were proficient in both reading and mathematics (the best performance in the region), but the district spent only $6,260 per student in 2008-09, 16% below the regional average. In contrast, in the Quaker Valley School District, which spent $10,734 per student (the highest spending in the region and 44% higher than the regional average), only 78% of the 5th graders were proficient in reading.

It’s time to declare that “adequate yearly progress” isn’t adequate, and to demand that schools dramatically improve their students’ proficiency with the resources they already have. Although Presidents, Congressmen, Governors, and State Legislators all talk about improving education, it’s the more than 1,110 elected school board members in the region who actually control how nearly $5 billion in tax monies are spent to educate the 350,000 children in the region. Half of these school board members are up for election next year (2011). Typically, there is little competition for these positions, and most incumbents are re-elected. If you’re unhappy with your school district’s performance, now is the time to think about recruiting new candidates who are committed to dramatically improving performance. Information on how to run for a school board seat is available at www.psba.org/parents-public/board-candidates/how-to-run.asp.

(A version of this post appeared as the Regional Insights column in the Sunday, November 7 Pittsburgh Post-Gazette.)

Dead Calm

2010-11-01T17:28:00.003-04:00

Job growth in the Pittsburgh region appears to have been on hiatus over the summer. After a couple of months of strong job growth in the spring, no real progress was made in rebuilding the region’s job base over the summer. In September, we had 2.5% fewer jobs than two years earlier (before the recessionary job losses began to hit here), exactly the same shortfall as we had in June.

Compared to other regions (using seasonally adjusted figures), our lackluster job performance over the summer is about average. Atlanta, Denver, Indianapolis, Milwaukee, Phoenix, and St. Louis added net jobs over the summer compared to seasonal norms, whereas Pittsburgh lost a little ground on that measure, although not as much as a number of regions in California did.

The net result of the job growth we experienced in the spring and the lack of significant change over the summer is that we had 7,000 more jobs in September than a year earlier (September, 2009). About half of the region’s industries added net jobs over the past twelve months, but the other half lost jobs, meaning that significant dislocations have continued to occur for many workers. The biggest job generator over the past year has been in the broad category of “administrative, support, waste management, and remediation,” which includes everything from janitorial services to temporary employment. There has also been a significant recovery in the retail sector; Pittsburgh has seen higher job growth in retail over the past year than most regions in the country, which is likely due to the fact that the region did not have the retail overbuilding that occurred in many areas of the country.

Although having 7,000 more jobs in the Pittsburgh Region than a year ago is progress, it’s far short of what we need to recover from the recession. There are still over 29,000 fewer jobs here than two years ago, so it’s not surprising that there are still over 30,000 more people unemployed than two years ago. Most of our industries continue to employ several thousand fewer workers than before the recession; the only exceptions are health care, higher education, mining, and the leisure and hospitality industries. Manufacturing remains the hardest hit, with 13,600 fewer jobs than two years ago. The only good news about manufacturing is that employment has been steady throughout 2010 – no gains, but no more losses. It will be extremely difficult for the region to recover if it cannot regain many of those manufacturing jobs.

Jumpstart Job Creation Through Startup Businesses

2010-10-03T06:26:00.002-04:00

After some very positive signs of recovery in the spring, job growth in the Pittsburgh Region has been stagnant during the summer. In August, we still had over 31,000 fewer jobs than we did in 2008, and 14,000 fewer jobs than we did in 1999. That’s bad news for the nearly 100,000 workers in the region who are unemployed.

Where should we look to jumpstart job growth here? Although conventional wisdom has held that small businesses are the principal engine of job growth in the U.S. economy, a recent study from the National Bureau of Economic Research indicates that the biggest contributor to net job growth isn’t small businesses, but new businesses, i.e., entrepreneurial startup firms. Business startups accounted for all of the net new jobs created in the U.S. between 1980 and 2005.

That doesn’t mean that older and larger firms don’t create new jobs – they do, but they also eliminate jobs through layoffs, plant closings, bankruptcies, etc. The study says that in the absence of startup firms, job creation and job destruction by other firms would result in no net job growth.

Although Pittsburgh was once one of the most entrepreneurial places in the country, in recent years it has become one of the least. Data from PittsburghToday show that the Pittsburgh region has one of the lowest rates of startup businesses compared to other regions, and a smaller percentage of our jobs are in young firms than other comparable regions. This may also explain why, as described in a previous post, Pittsburgh has fewer jobs in key technology sectors than most regions in the country.

Pittsburgh also has a weak reputation as a home for entrepreneurs. Pittsburgh ranked 60th in Fortune Small Business magazine’s 2008 “Best Places to Live and Launch a Business” and ranked 48th out of 50 large cities on Entrepreneur magazine’s “2006 Hot Cities for Entrepreneurs” list.

What is needed to make Pittsburgh one of the top regions in the country for startup companies, and how can you help?

First, we need to encourage cutting-edge research and development, since every successful startup starts with a good idea. We already have a wealth of innovative ideas being generated at our universities, thanks to nearly a billion dollars in research each year. But the universities need your help to build their endowments so they have adequate facilities and personnel to support that research.

Second, we need to encourage talented university students and faculty to turn that research into commercializable products. For example, Project Olympus at Carnegie Mellon helps students and faculty explore the commercial potential of their research. However, this innovative and valuable program has no long-term source of funding and could have a much bigger impact with more resources. You could help by making a contribution to support it.

Third, we need to provide technical assistance and seed funding to entrepreneurs, particularly those with products and services in high-growth sectors like advanced materials, energy, information technology, and medical devices. Thanks to Innovation Works, we already have one of the best overall programs in the country for supporting technology-based startups. But it is overly dependent on state government funding, and it’s currently facing significant cutbacks due to the state budget deficit. You could help sustain it by making a tax-deductible contribution to its operating budget.

Fourth, we need to invest in the startup firms themselves so they have adequate capital to grow. The most critical need is “angel investors” – high net-worth individuals making investments of $25,000 to $250,000 early in a startup company’s growth. The Pittsburgh Region is fortunate to have BlueTree Allied Angels, a professionally-managed angel network, but BlueTree needs more angel investors to join its ranks, The next governor could help by creating a tax credit program for angel investors in Pennsylvania similar to what Ohio and a number of other states have.

Finally, we need to buy the products and services those startup firms produce. A company can’t be successful without customers, and many local startups have been forced to go outside the region to find their first customer. You can help by looking at the BlueTree and Innovation Works websites to identify startup companies with products or services you could use.

We have a good foundation to be one of the most startup-friendly regions in the country. But current programs need to be significantly expanded, and we need a more aggressive effort by public officials and regional economic development agencies to tell prospective entrepreneurs that Pittsburgh is committed to helping their companies be successful here.

(A version of this post appeared as the Regional Insights column in the Sunday, October 3, 2010 Pittsburgh Post Gazette.)

Tech Businesses Are a Small But Important Piece of the Region’s Economy

2010-09-05T08:09:00.003-04:00

For many years, the Pittsburgh Region has been working to grow technology businesses and jobs here, and we’ve had a number of major successes to celebrate. But how big a role do technology businesses actually play in our economy now, and how does our technology sector compare to other regions?

It’s actually quite hard to define and measure the “technology sector.” Some people use very broad definitions which include almost any business that uses sophisticated technologies to deliver products and services, ranging from steel mills to hospitals. But when most people think of “technology businesses,” they’re thinking of businesses that primarily deliver cutting-edge products or services such as new drugs, medical devices, or sophisticated computer equipment and software.

Although it’s difficult to obtain job creation data for many of these more narrowly defined technology businesses, data from the U.S. Bureau of Labor Statistics are available on four types of technology industries which the region has been working to grow for some time. Two represent the core of the life sciences sector: pharmaceutical and medicine manufacturing, and medical equipment and supplies manufacturing; two represent the core of the information technology (IT) area: computer and electronic product manufacturing, and computer systems design.

In 2009, these four industries employed just over 20,000 workers in the Pittsburgh metro area. That’s a lot of jobs, but a relatively small part of the economy – only about 2% of the total private sector jobs in the region. They are, however, very high-paying jobs; average annual pay is around $60,000 in the first three industries, and it’s around $77,000 in the computer systems design industry. That’s significantly higher than the $44,000 that the average private sector worker in the region makes.

These businesses are typically quite small. Those 20,000 workers are employed by over 1,150 separate businesses, i.e., there are fewer than 20 workers per firm on average. The computer services businesses are the smallest – an average of 10 employees per firm – while the medical equipment and supplies firms have an average of over 30 employees per firm. The small size of the firms is partly a result of the relative youth of these sectors in the Pittsburgh region, but also reflects the fact that cutting-edge products are most often developed by entrepreneurs in small startup firms.

Despite two decades of regional efforts to grow the information technology and life sciences sectors, Pittsburgh is still not among the top 10 regions in the country in employment in any of these four industries.

The largest of the four is computer systems design; our region had over 800 firms employing over 8,400 workers in 2009, but 28 of the 36 large regions for which data are available had more jobs in that sector than Pittsburgh did, including both Columbus and Cleveland.

Close behind in terms of jobs is computer and electronic product manufacturing; we had 150 firms employing over 8,100 workers in 2009, but half of the 32 large regions for which data are available had more jobs in that sector than we did, including places like Baltimore and Milwaukee.

The medical equipment and supplies industry is smaller than the others – 108 firms employing over 3,400 workers in 2009 – and at least 13 regions have more jobs than that, including Denver and Indianapolis.

The pharmaceutical industry is extremely small here – only 7 firms employing about 300 people, fewer than most regions in the country.

How did the technology sector fare during the recession? The computer systems design industry actually added over 700 jobs, a 10% increase. However, the other three sectors lost a combined total of over 1,600 jobs between the end of 2007 and the end of 2009, more than offsetting the gains in computer systems design jobs. In addition to losing jobs, we also lost 5 medical equipment companies and 3 computer and electronic product manufacturing companies, which will make it particularly difficult to get those jobs back during the recovery.

The relatively small size of our IT and life sciences sectors means that we need to focus more attention on them, not less. In the future, opportunities for job creation will increasingly come from businesses in these and other technology sectors. In fact, the medical equipment and computer products sectors now represent more than one out of every 8 jobs (13%) in our region’s shrinking manufacturing sector.

We have a rich resource of cutting-edge ideas in both IT and life sciences at Carnegie Mellon, Pitt, and UPMC, but we need to work harder to ensure adequate startup capital, technical assistance, facilities, workers, and ongoing financing to enable entrepreneurs to turn those ideas into successful and growing companies.

(A version of this post appeared as the Regional Insights column in the Sunday, September 5, 2010 Pittsburgh Post-Gazette.)