People Are Expensive…

With much Presidential fanfare, perhaps slightly misplaced, the Bureau of Labor Statistics (BLS) just announced that the economy added 235,000 new jobs in February. Buried below the fold was the fact that healthcare positions accounted for 26,800 of those jobs or 11.4% of the total. The BLS goes on to observe that healthcare will continue to be the single fastest growing occupational category, which challenges one to reconcile the promise of efficiency gains with new technologies with the drumbeat of ever-expanding healthcare job rolls. When will the healthcare system see the benefits of technology’s operating leverage?

Just over a year ago, the BLS published a comprehensive employment survey which projected employment through 2024 across the 819 occupation categories that it tracks. Nine of the top 15 fastest growing categories are in healthcare (although surprisingly, the fastest growing category was “wind turbine service technicians”). In fact, 2.3 million of the expected 9.8 million net new jobs to be created by 2024 are in healthcare; that is, nearly 1 in 4 new jobs. Over 1.3 million of those jobs will be relatively high-skilled medical work with meaningfully above average pay levels (there are 1.5 million Uber drivers). Nearly 10% of the projected 160 million employed Americans in 2024 will work in healthcare. Interestingly, and unrelated, the 145.8 million employees today possess $92.8 trillion in household net worth (pre-Inauguration).

Across all of healthcare the median annual wage in 2014 was $61,700, although the compensation range was quite wide. Practitioners (i.e., surgeons, physicians, dentists) enjoyed median wages of $187,200 – the highest of all categories – while healthcare support jobs had median wage of $26,400 in 2014. Disappointingly, there is estimated to be a $20,000 pay gap between men and women doctors per Fortune research released for International Women’s Day last week. Perhaps not surprisingly, healthcare workers tend to have higher wages on the West Coast and in the Northeast.


For the U.S. economy to add a net of 9.8 million new jobs by 2024, there will need to be 46.5 million new job openings created to account for the 35.3 million “replacement needs.” The dynamic around “replacement needs” is fascinating when applied to healthcare. Given practitioners tend to be older, 3.1 million highly compensated jobs will be created to accommodate the expected net growth of 1.3 million high-skilled healthcare workers. Hard to see that many of those jobs will be held by robots.

There appears to be another fundamental socio-demographic force at work in healthcare today. Researchers at Rutgers University recently released a 15-year study which shows that many “disadvantaged” men (immigrants, less educated, poor) are occupying what historically have been considered positions held by women, particularly in healthcare. While the prevalence of women healthcare practitioners has increased markedly since 2000, most of these positions still are held by men (except for pharmacists and veterinarians). With the bifurcation of the employment landscape to either high and low paying jobs, significantly more men are holding low-skill healthcare jobs than they were in 2000. Sociologists have coined this phenomenon as the “employment trap door.”

The economist Joseph Schumpeter popularized the concept of “Capitalist Creative Destruction” in the early twentieth century. As a venture capitalist, I have been fascinated by the implications of his theories and am often tempted to apply them to the healthcare system. The great promise of novel technologies coming to market today is to drive dramatic operating efficiencies, which unfortunately continue to be quite elusive. One would expect that technology should lower both the financial and human capital intensity of the business of healthcare.

Simply put, the calculus around productivity (output divided by input) is further complicated as the system moves from “fee for service” to value-based models. As patients become consumers of healthcare, the notion of output needs to be redefined, accounting for a number of new variables around patient satisfaction and quality. As the system straddles these two payment models, several structural inefficiencies persist. Simply chipping away at existing “fee for service” workflows likely will never get step-function improvements in productivity.

Given that the behavior of most executives reflects what they get paid to do, it is instructive to look at compensation frameworks. While the proliferation of new technologies demands that executives become digitally literate, it has also led to a very crowded C-suite with the creation of a bundle of new titles – Chief Transformation Officer, Chief Analytics Officer, Chief Information Security Officer, etc. – adding to overall operating costs. These jobs have become meaningfully more complicated given the threat of hacks, as well as the explosion of mobile apps, novel sensors and wearables, just to name a few. As the healthcare system moves to value-based models, C-suite bonuses are increasingly tied to metrics such as patient satisfaction, quality and safety; not just financial benchmarks. These new models reward (and penalize) executives for meeting a host of new targets, which makes it difficult to both strip-out legacy costs while introducing new costs to manage to a number of different and new objectives.

In 2015, median compensation for the top 300 U.S. CEOs declined 3.8% while for the top 200 healthcare executives, median pay increased by 8.0% to $6.9 million (112x the median pay of all healthcare jobs), according to Modern Healthcare. Interestingly, over 50% of the compensation frameworks for the top 20 publicly traded hospital companies now have bonuses tied to patient satisfaction, usually accounting for 15-30% of total compensation, according to research conducted by Frederic W. Cook & Co.

For healthcare technology companies (the vendors to the healthcare system), compensation levels are quite different. Just over 40% of senior executives at those companies earn between $151,000 to $250,000, while 20% earn less than $150,000. Approximately 5% earn greater than $400,000 per research from The Tolan Group. Just under 20% had no opportunity for annual cash bonuses, while 10% could only receive additional equity. There exists a classic bell curve to the data with the mid-point of the bonus potential in the range of 25-50% of base pay.

Crawling through the rest of the BLS report highlighted a handful of other interesting nuggets. The “home health aides” category is projected to be the fifth-fastest growing category (38%) to 348,000 people in 2024. Three spots down the list was “nurse practitioners” which is expected to grow by 35%. Arguably much of the healthcare labor to be added is likely to be in non-hospital settings, which hopefully will provide some degree of operating leverage to the healthcare system as technologies offer workers the ability to provide care in other less expensive settings.

At the bottom of the BLS list were other occupational categories that had meaningfully less rosy forecasts:

  • Something called “locomotive firers” will decrease by 70% to only 5,000 jobs
  • “Switchboard operators” and “photographic process workers” will decline by 33% each
  • While “postal service mail carriers” will decline by 26%, there will still be 219,000 mailmen in 2024. Email can only go so far I guess. Separately, I am fascinated by the U.S. Postal Service (USPS) which generated $71.5 billion in revenue in 2016 while losing $5.6 billion. The USPS employs nearly 640,000 Americans all-in to bring bundles of paper to our homes everyday, nearly all of which we immediately throw away.

Finally, there are thought to be 2.8 million Americans who have served in either Iraq or Afghanistan, which is 22% more than the number of new healthcare jobs that will be created by 2024.

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