December 30, 2002
By DAVID LEONHARDT
BRIDGEWATER, N.J.-When Fred Hassan wanted to prove that Pharmacia could become a globally powerful drug company five years ago, he moved it out of its London headquarters to an office park here in the state he considered "the medicine chest to the world."
That shift of 380 of his employees into a gray one-story building that AT&T had abandoned to cut costs proved to be just the beginning.
By 2000, Pharmacia had outgrown the space, and it took over a nearby group of buildings that was once occupied by an investment company. This summer, Mr. Hassan, Pharmacia's chief executive, also bought a campus in Basking Ridge that had been AT&T's headquarters. Not far away, other drug companies have moved into buildings once filled with employees of Exxon and I.B.M.
The expansion is part of a 15-year regional transformation that has provided the Northeast corridor with an important economic cushion during the recent downturn.
With little of the fame that can be claimed by Silicon Valley, the Northeast's urban corridor has quietly built its own economic powerhouse by becoming the nation's health care epicenter. Roughly following the line of Amtrak's Metroliner and stretching from Boston to Bethesda, Md., this medical megalopolis encompasses a vast array of facilities.
It is anchored by urban complexes serving as homes for many of the nation's most influential teaching hospitals. It includes the big suburban campuses of most of the world's major drug companies. It also stretches to clusters of research outfits in the Boston area and around the National Institutes of Health outside Washington.
"This is the center of the nation's health care economy," said Mark Zandi, chief economist of Economy.com, a research firm in West Chester, Pa. "Just as chips do it for the Bay Area and Boeing does it for Seattle, health care drives the economy in this corridor."
The growth has come as other traditional engines of the region have faltered. Even as health care companies in the Northeast's medical megalopolis have added 50,000 jobs, since 2000 all other industries combined have lost 220,000, ending a decadelong boom that had left many taking prosperity for granted.
Now, Wall Street has retrenched deeply, bringing New York City its worst budget woes in decades and wounding the mutual fund companies in Boston. The fallout from Sept. 11 has hurt tourism, particularly in New York and Washington.
The burst Internet bubble has had its effect too, echoing among publishing companies throughout the corridor that had added workers when advertising was plentiful. And major telecommunications companies like AT&T and Lucent Technologies have cut thousands of jobs, many in the New Jersey suburbs.
"The telecom industry and the financial industry have crashed," said Henry A. McKinnell, the chief executive of Pfizer, the drug company based in New York that recently bought Pharmacia and now owns AT&T's old headquarters. "We're still growing."
Partly as a result, almost one out of every 10 jobs in the Northeast corridor today is in health care, a higher portion than in any other region of the country. That is up from one out of 14 in 1987, according to Economy.com. In New York City, 4 of the 10 largest private employers are medical institutions. In Philadelphia, it is 7 out of 10.
An Economic Engine
Health care's gains have helped keep unemployment in the region lower than in the rest of the country. By contrast, during the recession of a decade ago, the Northeast suffered far more than most other areas and took much longer to recover.
The rise of this regional health care complex has also solved part of the Northeast's long quest for an economic engine to replace its disappearing manufacturing sector. Moreover, like information technology-an industry the region has never fully succeeded in attracting-health care, on average, pays relatively generous salaries.
In fact, some people who once worked in the region's technology sector have now found a refuge in health care.
Michael J. Mercurio, 32, who lives in Hanover, Mass., was one of many young workers who left jobs in the last five years for a dot-com. But by the end of 2000, when he realized that the Web design company where he worked, Event Zero, would probably collapse, he had scrambled back to his old employer-the billing department of Massachusetts General Hospital.
"I feel extremely fortunate," said Mr. Mercurio, whose wife, now attending business school at Babson College, also worked at Event Zero. "I have numerous friends who were laid off. Some of them are still looking a year and a half out."
But not everyone can make such a transition, and the health care boom is by no means an economic cure-all. Many jobs in hospitals and home health services still pay poorly, and health care's rigorous educational standards often make upward mobility difficult.
Drug companies have increased their sales and employment partly through a wave of advertising that many scientists say can be medically dubious. And spending on health care rarely makes an economy as productive as manufacturing or financial services.
Health care's powerful presence in the Northeast springs from a series of developments, including the growth of drug companies, which have long been located here.
The older age of the population has also created a large need for doctors and home health care workers. Research hospitals are increasingly attracting patients from other parts of the country and from overseas who are eager to get the best treatment money can buy.
Whatever the reasons, economists say the medical industry has now reached a critical mass that makes its regional importance likely to grow even further. Pharmaceutical workers know they can settle in New Jersey and switch jobs in later years without moving. Two-income families in which both spouses have medical careers can live in, say, Columbia, Md., with one commuting to Johns Hopkins in Baltimore while the other works at the National Institutes of Health in Bethesda.
Employers have eagerly chased these workers, with Boston becoming a leading biotechnology center even as Celera Genomics and other human-genome research companies have opened in suburban Maryland. "This is where the pool of talent is,' said Patricia M. Danzon, a management professor at the University of Pennsylvania.
Foreign drug makers have continued to move to the corridor, too. In May, Novartis, based in Basel, Switzerland, announced that it would build a research center in Cambridge, Mass., that would be led by a Harvard Medical School professor and eventually employ 900 people.
In September, Altana, a German drug maker, opened its marketing headquarters in an old Exxon building in Florham Park, N.J. It chose New Jersey over California partly because of the shorter flight times from Europe and the lesser time difference. The company also wanted to be near the biggest pool of pharmaceutical workers, said George W. Cole, the president of the division.
East Versus West
The origins of the health care corridor stretch to the late 19th century, when the nation's largest universities-then all in the Northeast-began to build teaching hospitals.
The modern pharmaceutical industry was born around the same time. New Jersey's proximity to New York and Philadelphia and its access to natural resources helped attract early drug companies like Johnson & Johnson and chemical companies that expanded into drug making.
By the late 20th century, however, newer industries, concentrated on the West Coast, were growing more quickly. Despite repeated attempts by politicians and executives, the Northeast's technology clusters, including Silicon Alley in New York and Route 128 around Boston, never approached the weight of Silicon Valley or Seattle's software industry.
As a result, the Northeast region, while certainly basking in the national economic boom of the late 1990's, lost ground. From 1995 to 2000 the number of jobs in the already crowded metropolitan area that encompasses Silicon Valley grew more than 4 percent a year, according to Economy.com. In the Northeast corridor, the rate was just 2 percent.
Since 2000, however, the crash of technology spending has caused Silicon Valley's employment to fall 3 percent a year, while the drop has been only 0.5 percent from Boston to Bethesda. If anything, the failure of efforts to make the Northeast's economy look more like that of the San Francisco area now looks fortunate.
Economists call health care an unusually good job creator because the industry tends to grow even in recessions and employs people at many wage and educational levels. In the Northeast corridor, health care pays $43,200 a year on average, well above the national average for all jobs of $37,000, Mr. Zandi of Economy.com said. Health care jobs pay a little less than the average job in the Northeast only because the concentration of exceptionally lucrative Wall Street jobs skews the overall numbers.
The biggest downside in health care, however, may be the difficulty in moving from one wage level to another. Assembly-line workers can become foremen; copywriters at advertising agencies can rise to the executive suite. Getting a significant raise in medical care often requires getting a new degree. Many workers struggle to escape the entry level.
"As a home-care worker, you can't go any higher," said Mary Toni, a Bronx resident in her 50's who makes $6.55 an hour taking care of elderly patients in their homes, up from the $6.25 she made when she began in 1996. "For any upgrade, you have to go back to school."
Ms. Toni has already taken one computer class and plans to receive more training. But finding the time is not easy. "The bills are coming in," she said.
Growth and Problems
With the aging baby boom generation on the cusp of its most medically dependent years, health care appears likely to continue growing more quickly than the rest of the economy. That should only help the Northeast.
But the coming surge in the elderly population also leaves the medical megalopolis prey to shifts in how the United States pays for its health care needs. Health costs have recently risen rapidly, making employers less willing to pay insurance premiums and contributing to an increase in the number of people without insurance.
"We are naturally vulnerable to the government's willingness to pay for health care," said Robert D. Martin, chief executive of the University of Pennsylvania Health System.
Faced with budget deficits and increasing medical costs, many states have stepped up efforts to reduce their spending on drug prescriptions and hospital stays.
Delaware, for example, has joined a consortium of states that buys drugs in bulk, and it has consolidated some of its insurance policies, favoring less expensive ones. "It is the fastest-growing part of our budget, no question about that," Gov. Ruth Ann Minner, a Democrat, said in an interview. "We have to look at how we can control the costs and still provide the service."
Even the most valiant efforts to control costs, however, cannot hold back the demographic pressures to spend more on health research and services. Given the American preference for free markets, any limits on drug prices are also likely to be less restrictive than those in Europe, which helped send the pharmaceutical industry fleeing to the United States.
"The R&D has just shifted to the U.S.," said Tom McKillop, a native of Scotland who is the chief executive of AstraZeneca, which is based in London and employs about 4,000 people in Wilmington, Del. "America has been big winners in macroeconomic terms."
While the jump in drug spending has no doubt been good for the Northeast's economy, it has sometimes come at the expense of the welfare of the nation as a whole. Many scientists maintain that drug makers have at times exaggerated the benefit of their costly new products, steering people away from less expensive but equally effective medications.
Health care spending also does not generally make other parts of an economy more efficient, in contrast to technology investments that allow a society to produce more goods and services with the same effort.
But medical spending can contribute to society in ways that many people consider more valuable than money: adding years of healthy life. The newly intense search for longevity-caused by the aging of society, an increase in disposable income and a burst of new treatments, particularly for heart disease-is the prime reason the region's medical megalopolis should continue to thrive.
Of the five cities whose institutions receive the most research money from the National Institutes of Health, only No. 3 San Diego is not along the Metroliner medical corridor. The other four, in order, are Boston, New York, Philadelphia and Baltimore.
Patients follow this money, looking for advanced treatment. For example, 18 percent of the patients at Johns Hopkins now come from outside Maryland, up from 13 percent a decade ago.
Consider Andrew J. Lee, whose mother in South Korea recently learned that she had thyroid cancer. Her doctors there told her that surgery was the best treatment, but the family wanted to know that the world's top doctors agreed with the diagnosis. So Mr. Lee, a young lawyer who lives in Northern Virginia, began to help his parents plan a trip to the United States.
Looking at the cancer centers ranked highest by U.S. News and World Report, he focused on Memorial Sloan-Kettering in New York and on Johns Hopkins, he said, because they "were a distance that we could travel to in a day."
Doctors at the hospitals, which both have special offices to work with foreign patients, agreed that Mr. Lee's mother should have the surgery. She flew home, where she was insured, to have the operation.
Mr. Lee said his family had no regrets about spending $6,000 on travel and doctors' consultations to be assured that they were making the right decision.
"We were able to get total confirmation," he said.