Kentucky Rural Health Works Program

University of Kentucky · College of Agriculture · Kentucky Cooperative Extension Service

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Health Care Services: Three Critical Roles in Rural Economic Development discussed the importance of health care in economic development. This brief focuses on the specific economic impact of rural hospitals. Rural health care providers are an important source of economic growth and stability in their local economy. This growth and stability comes from their direct provision of jobs, indirect support of local services and hospital employee spending on local goods and services.

An examination of job earnings data may help determine the importance of health care in Kentucky’s economy.

Table 1 represents the percentage of total earnings derived from the health care sector. The health care sector includes hospitals, doctor and dentist offices, health clinics and other health care providers. This is one measure of the economic importance of an industry. As the table depicts, the dependence on health care as an economic engine varies by Area Development District.

However, this data does not represent the total economic impact of the rural health care system or the specific economic impact of rural hospitals. A rural hospital’s total impact on the economy is measured through economic multipliers. A multiplier represents the total economic impact of an industry or individual firm on the economy. There are three types of multipliers based on the type of economic impact analysis. The direct multiplier is based on the industry or company’s initial economic impact on the community. For example, if a hospital has revenue of 5 million dollars, then this figure becomes the direct economic impact on the community. The indirect multiplier is based on the economic impact of businesses that the hospital helps to support. For example, hospital purchases of local laundry services, food, landscaping or floral arrangements. Each of these establishments has an economic impact on the community via jobs and income. The induced multiplier includes the local hospital employee spending on goods and services at local establishments. These could include video store transactions, visits to the local grocery store or purchasing a home. The total economic impact is defined as the direct plus indirect plus induced economic effects.

The total economic impact of a hospital, measured via multipliers, is dependent on a number of factors. In determining the economic impact of a large institution, there are two major purchasing categories to consider: local purchases and non-local purchases. In effect, non-local purchases represent a leakage or loss to a local economy. For hospitals, many purchases by necessity must be made to distant locations. The complex technology and equipment of modern medicine is subject to large economies of scale and are only produced in a few places in the nation. This equipment might include x-ray machines, MRI equipment and other surgical equipment. Pharmaceutical supplies and drugs are also subject to these same forces. Further, some types of audit, legal and accounting services must be purchased from urban regions due to the complexity of services.

Hospital employee spending may also leak out of the local economy. Employees and their families may decide, for example, to see the movies in another town or purchase a vehicle in the nearby metropolitan area. Some employees may live in another community and leave the region on a daily basis. Leakage of dollars and income out of the community, via non-local spending, reduces the size of the multiplier and the economic impact of the hospital.

Future extension and applied research activity is being directed at measuring the full economic impact of individual rural hospitals on their local economy. This information can be used to rally support for local hospitals and health care providers and ensure a strong local economy. As people see the economic impact of a local hospital or other health care providers, they may be more willing to engage in supporting local services. The loss of a hospital or health car provider can be a blow to local economic growth.

As an example, an economic impact study was recently completed for the Knox County Hospital. Based on an economic multiplier, Knox County Hospital has a secondary economic impact of nearly 16 million dollars. 12 million dollars is represented by the hospital’s direct purchases. Another 4 million dollars is due to business spending by local hospital suppliers and employee purchases in the local economy. This information has been used by the hospital to support grant writing, inform local leaders of the importance of health care and support local health services.