(FORTUNE Magazine) – LARGELY overlooked in the political debate over how to reform America's health care system is just how huge the effect of reform will be: The coming revolution in this business will have a far broader and more profound impact on jobs, corporate fortunes, and economic growth than even the much-talked- about military builddown.

Pick a city, and it's almost a sure bet that the medical centers and surrounding laboratories and doctors are the area's largest employer. Pittsburgh? Steel City is now Suture City, where the healing arts employ 106,000 in the region and steel only 25,000. Some 110,000 in greater Houston work in medicine, only 66,000 in oil and gas. In New York City, health care is about even with banking and investment at 280,000. Around 10.6 million Americans, one of every 11 in the work force, toil in the business: 30,000 drug company salespeople, 39,500 psychiatrists, 90,000 dietitians, 33,500 osteopaths, and on and on. That doesn't include the many thousands who are just outside the industry but closely dependent on it -- the team that works exclusively on the pharmaceutical account at the advertising agency or the pipefitters who install the plumbing in the new hospital wing.

While this crowd includes far more minimum-wage security guards and floor moppers than $1-million-a-year plastic surgeons, its ranks mainly occupy the middle of the wage scale. In addition to employing well-paid service workers -- $35,000 to $50,000 for registered nurses and physical therapists in mid- career -- health care provides some of the nation's most lucrative manufacturing work. Pharmaceutical companies employ 251,000 people; manufacturers of medical devices from catheters and surgical masks to CT scanners and X-ray tubes employ 267,000. How will the shakeout already under way affect these people and their employers? Will health care reform be a net job creator or job destroyer? What segments of the industry will prosper? Who will lose?

Figuring out the broad bottom line is simple. The more successful health care reform is in holding down costs, the larger the job losses are likely to be. Indeed, if medicine's current 14.4% of GDP actually stops growing and shrinks back toward, say, 10%, the layoffs could mount into the millions. Leading reformer and Stanford economist Alain Enthoven thinks that's possible, though his is a minority view. Most experts hope for little more than stabilizing health care's share of the economy. In that case, overall medical employment might not shrink much. But the shifts among industry sectors would still be wrenching. Consider every reformer's favorite target, ''administrative waste.'' The term encompasses, among other things, the needless paperwork generated as hundreds of insurance companies quarrel over bills with almost 6,600 hospitals and 615,000 doctors. Estimates of the potential savings from cleaning such junk out of the system range up to $80 billion a year. But only a little of that money is for paper. Most goes for the salaries and benefits of the people who shuffle it. ''One person's administrative waste is another's livelihood,'' acknowledges Enthoven. Surprisingly, however, no one has estimated precisely how many jobs streamlining medical paperwork would cost. Here's a paradox: Until such efficiencies take hold, reform could provide a short-run boost to health care employment. That's because Clinton has promised to extend insurance coverage to the roughly 37 million Americans who now go & without. How much new business this will create depends, in part, on how quickly universal coverage becomes law and how generous the basic package of benefits is. Clinton has promised to unveil the details of his reform plan by mid-May. Congress is sure to insist on changes, so hammering proposed legislation into law could easily take until 1994. IN THE LONG RUN, however, the job-creating effects of expanded coverage will be more than offset by relentless pressure to hold down costs. Government- imposed cost and price controls -- and at least some new ones appear likely -- are one reason. These would affect the livelihoods of assembly-line workers in the medical device and pharmaceuticals industries as well as doctors and dentists. Lorraine Schwarz, a health care analyst with the stock brokerage Wertheim Schroder, explains why: ''Suppose a hospital now bills a patient with corporate insurance $80,000 for a coronary bypass. If the government says it has to drop the price to $27,000, the average for a Medicare patient, the hospital will have to make up the lost revenue somewhere. Maybe it won't buy that new oxygenator with all the bells and whistles.'' Hospitals are nervously reducing inventories. Investors in early April cut in half the market value of U.S. Surgical, the country's leading manufacturer of laparoscopic tools for operations through very small incisions. Whatever Washington cooks up, the other megatrend driving down medical costs and reshaping the industry will be the steady expansion of managed care networks. Some 56% of Americans in group health plans are enrolled in managed care, up from 29% in 1988. Though they come in a bewildering variety of configurations, all limit a patient's choice of doctor and hospital. Instead they channel him to a selected team of primary-care physicians. Unlike independent physicians whose charges, under traditional fee-for-service plans, are covered no matter how many services and tests they perform, doctors in managed care networks are under pressure to control costs. If they are unable to treat a problem quickly and inexpensively, they dispatch the patient to the right specialist before he drifts from gastroenterologist to nephrologist, gathering huge bills as he goes.

Some experts believe the rise of managed care may be the main reason for the recent -- and unexpected -- decline in medical price inflation. After reaching a high of 9.6% in 1985, it fell to 6.6% last year and 5.6% for the first quarter of 1993. The Clinton Administration's prescription for health care reform will likely accelerate the shift to managed care. Dr. Michael M.E. Johns, dean of the medical faculty at Johns Hopkins University, predicts that by the end of the decade 90% of Americans will be enrolled in plans in which they can get care only from prescribed hospitals and physicians. What will a health care system dominated by competing managed care networks look like? The future is unfolding now in Minneapolis and St. Paul. Almost three-quarters of the two million residents of the Twin Cities -- employees of Honeywell, General Mills, and 3M, among others -- have signed up for managed care programs, the highest concentration of any major city. Because so many prospective patients are bound to one of several networks, doctors and hospitals have scurried to join them as well, lest they be left out in the Minnesota cold. Result: A natural competition has evolved on its own. Purists can argue that it is still far from a robust free market in which decisions are based on price, quality, and other measurable data. Emotions remain a powerful force in medical choices. Observes Stan Jones, a Washington health policy consultant: ''If the executive vice president's wife has cancer and her oncologist is in network A, that company won't switch to network B in a hurry.'' But the networks have kept prices in check, whether out of fear that customers might fly, worry about government edicts if prices continue to rise, or simply pride that they can operate as efficiently as the next network. That's good news for Twin Cities employers, who paid on average $2,969 to cover a worker in an HMO last year, the lowest among 13 large cities surveyed by benefits consultants Foster Higgins. The comparison is especially compelling if you look at the $4,080 annual average cost of providing traditional fee-for-service insurance. It explains why most large U.S. companies are rapidly migrating to managed care and why they expect reform to cut their overall health care costs. (By contrast, small employers, most of whom don't provide coverage, face rising costs if, as expected, Washington requires that they begin doing so.)

How the networks of the Twin Cities have saved money so far -- and what they still have to do -- reveals much about the way the U.S. health care industry will evolve. Take hospitals, which will account for roughly 40% of all health care spending this year (see chart): In Minneapolis and St. Paul, half a dozen hospitals have been squeezed out of business over the past decade, unable to compete with the networks or find a spot within one. Where there were once 10,000 beds, there are now only 8,000. The survivors have also reduced staffs. At University of Minnesota Hospital, Gregory W. Hart, general director of administration, has pared the payroll from 4,000 to 3,500 over three years. The cuts included eliminating his own former position as chief operating officer when he succeeded to the $160,000- a-year chief executive's job. ''I want to get the staff down to 3,100, and that will include cutting the management ranks,'' says Hart. ''Nursing assistants and lab technicians might not have to leave, but they'll have additional jobs.'' Hospitals are to health care manufacturers what the Pentagon is to defense contractors: the largest customer by far. But with this new budget consciousness, the medical arms race that has kept suppliers prosperous is winding down. Hospitals commonly stuffed enormous inventories into their closets, not so much to cover emergencies as to satisfy each physician's preferences and prevent him from moving to a rival hospital. No more, says Gordon Sprenger, executive officer of HealthSpan, Minnesota's largest managed care network. HealthSpan used to keep on hand a dozen varieties of artificial hips at prices from $1,600 to $4,500. Says Sprenger: ''We sat our suppliers down and told them we weren't going to stock more than two or three. Our costs are down by a third.'' Other changes could affect not just what supplies doctors use but how much doctoring they perform as well. At HealthSpan hospitals, Sprenger says, ''the next dollar we save will come from not doing that questionable open-heart operation at all.'' If that's what managed competition leads to, then incomes for the nation's 2,500 cardiovascular surgeons (average income after office expenses: $308,000) could dwindle substantially. Medical equivalents of the latest B-2 bomber will buck up against buyer resistance from even the wealthiest institutions. Mayo Clinic, for example, has chosen not to build a $5-million-plus PET scan center. PET (for positron emission tomography) observes chemical changes as they take place within the body. Johns Hopkins decided not to purchase a $3.3 million gamma knife, a device that generates a beam to dissolve brain tumors. Instead, Hopkins adapted an expensive piece of machinery it already owned, a linear accelerator, for the job. , Will the new frugality squelch innovation? Probably some. Jesse Treu, general partner of Domain Associates, a venture capital firm in Princeton, New Jersey, recently skipped an opportunity to invest in a hardware system that would aid surgeons in tedious operations. The cost to the hospital would probably be $200,000 or more, Treu reckoned, and it might not be a high priority. But unless Clinton and Congress make the mistake of imposing rigid controls on the costs of new products, real innovators -- companies whose breakthrough drugs or devices either cure as no rival can, or do so for much less -- should continue to thrive. Concentrating more buying power in the hands of cost- conscious networks will mainly hammer the profits and payrolls of me-too suppliers that relied on incessant medical price inflation and the lack of scrutiny that fee-for-service insurance encouraged to get by. ''Anybody trying to sell us a generic product will have a tough time, because we will insist on steep discounts,'' says HealthSpan's Sprenger. Surveying the U.S. pharmaceuticals industry, Paine Webber analyst Ronald Nordmann divides the top ten companies into two groups. The five with original products and strong research -- Bristol-Myers Squibb, Merck, Pfizer, Schering- Plough, and Warner-Lambert -- should do well in the 1990s. The others -- American Home Products, Eli Lilly, Marion Merrell Dow, Syntex, and Upjohn -- face tough times (FORTUNE, May 3). WHO ELSE is going to prosper in this parsimonious era? Exporters, for one. If the likes of HealthSpan buy fewer hips and heart surgery tools, a manufacturer might try Singapore or Spain. Medical technology is the fastest- growing sector of American exports. Products made in the U.S. accounted for about half the $71 billion of medical devices sold worldwide last year. Overseas markets have become increasingly important to Twin Cities health care manufacturers, a cluster so dense the industry has dubbed the neighborhood Medical Alley. Among them: Medtronic and the CPI division of Lilly, which make most of the pacemakers produced in the U.S.; St. Jude Medical, first in mechanical heart valves; and Scimed, a leading manufacturer of catheters for cleaning out clogged arteries. Heart disease helps drive the Minnesota economy. St. Jude is counting on foreign sales for the bulk of its growth. The company's heart valve, scarcely more impressive looking than the cap of a baby bottle, sells for $3,500 nonetheless, because it's made of pyrolytic carbon and will open and close 35 million times a year despite the body's attempts to destroy it. The company sold 72,000 or so last year, about half of them abroad, and Chairman Lawrence A. Lehmkuhl expects the foreign share to grow to 70% by the year 2000. ''We have pretty well whipped rheumatic fever in this country, one of the major causes of deformed valves,'' says Lehmkuhl. ''But other countries haven't.'' Korea has become an important customer. Germany has built 30 open- heart-surgery centers in the past four years. That's good news for St. Jude's work force of 700. One of its machine operators earning $35,000 a year can probably count on keeping that prized manufacturing job for some time. Also likely to thrive are purveyors of information and communications systems. As hospitals feel increasing pressure to perform fewer coronary bypasses, for example, they want data to guide their decisions as to which patients are promising candidates for surgery and which aren't. That requires detailed reporting on who underwent the operation five years ago and how they are faring today -- ''outcomes review,'' as it's known in the trade. Unfortunately, most hospital records and communications are an archaic, expensive tangle. Ira Magaziner, the White House adviser who ranks second to Hillary Rodham Clinton on the President's health care task force, a few years ago supervised a study of nurses at a hospital in Providence. Its conclusion: They are so burdened with administrative detail that they spend more time with paper than with patients. Doctors and hospitals are inclined to blame telephone interruptions from numb-brained insurance companies. But a walk through a hospital corridor makes clear that a lot of wasted effort is generated on the premises. ''I start to check a patient's vital signs, and I'm interrupted by a call from the pharmacy because they can't read a doctor's prescription,'' says Ann Kalis, a registered nurse at University of Minnesota Hospital. At far too many hospitals, records go astray; patients are scheduled to be in two places at the same time. The reason, according to Dr. Ralph Korpman, CEO of Health Data Sciences of San Bernardino, California, is that hospitals spend only 1% to 2% of their operating budgets on information systems vs., say, banks, which spend 5% to 10%. ''The hospital staff spends its time putting together notes on paper towels,'' he quips. Privately owned Health Data, you won't be surprised to learn, has a cure for that: An information system that includes a computer terminal at each patient's bed. The nurse, doctor, or housekeeper puts in a key, and the screen tells each just what she has to know about the patient. It also tells the keyholder where both she and the patient are supposed to go next. The cost ranges from $5,000 to $15,000 a bed; so far 30 hospitals in several parts of the U.S. have signed up. Who will the losers be? Like the paper shufflers and me-too suppliers, many of the nation's 30,000 drug company salesmen are clearly an endangered species. The growth of managed care networks means their primary customers, individual doctors in private practice, will no longer be able to generate much business. Merck is already laying salesmen off. Sales representatives for other medical products sold directly to doctors face similar fates. The most vulnerable group in the industry may be the 400 or so insurance companies that cover employers with fewer than about 50 workers. Because most sell life, disability, and other kinds of insurance as well, it is hard to guess how many claims examiners, middle managers, and field agents could lose their jobs. Here's a number suggesting the rough size of the problem: 262,000 people work for insurance companies that derive more than half their revenues from health. Until the recent round of political attacks on drug company profits, this was possibly the most disparaged sector of the health care business. That's mainly because insurers of small businesses carefully avoid employers with a potential cancer, AIDS, diabetes, or heart disease patient on the payroll. They call it politely ''medical underwriting,'' a means of disaster protection. One $200,000 bone marrow transplant would wipe out years of premiums paid by a five-employee company. But critics call the practice ''cherry picking'' or ''skimming'' and denounce it as part of the reason for those 37 million uninsured. The big nationwide insurers -- companies like Aetna, Cigna, Metropolitan Life, and Travelers, which cover mostly large corporations and generally don't disqualify a customer because of a risky employee -- have dropped out of the association that represents medical underwriters. That leaves these companies somewhat isolated. They contribute significantly to congressional campaigns, however, and know how to vote. In the middle of Galveston, Texas, stands the city's only skyscraper, the 20-story American National Insurance building, home to one of these beleaguered insurers. After weeks of hearing himself and colleagues reviled by critics, American National President Orson C. Clay is understandably testy. ''Contrary to public opinion, we are not getting rich on health insurance,'' he says. ''We lost $10 million on it last year.'' HOW DOES HE justify that to shareholders? Clay explains that customers want a one-stop insurance company from which they can buy group life, disability, and health insurance, plus a pension plan. ''If we decided to pull out of health insurance, we don't know how much impact that would have on our other businesses,'' he says. ''That's one of the big questions in the industry.'' Medical underwriting is labor intensive. About one-third of American National's 1,370 employees specialize in health insurance. Dr. Harry Kelso, the company's resident physician, whose smiling face is reminiscent of the late Cary Grant's, reviews chancy applications. ''If someone has had a heart attack, we can insure his life because the actuarial tables will tell us how long he is likely to live. But his health policy won't cover heart trouble. If he has a second attack and lives, we don't know how much it will cost for intensive care, drugs, and the rest.'' As medical claims stream into American National -- $70 million worth last year -- they are dispatched to Mary Hutto or one of 100 women much like her. She is 36 years old, a high school graduate, divorced, and earns about $25,000 a year. A bill flashes on the screen of Hutto's computer terminal, which is decorated with photographs of her three children. A doctor has charged $75 for procedure 90060 (a 15-minute office visit), one of thousands of procedures listed in the directory at Hutto's side. If that's the going price in the doctor's zip code, the claim will likely be paid within eight days. It's not hard to see how software could take over Hutto's job, or at least this part of it. Barry Rochkind, 42, is an American National sales agent and, true to the demands of the calling, a cheerful extrovert. After delivering a daily ten- minute sports commentary over the local radio station, he makes his rounds through Galveston's sunny streets in his 1991 Pontiac convertible. On a recent morning he made a sales pitch to Judy Ahern, 40, and Virginia Weber, 32, employees of a small firm that creates calligraphic wedding invitations, birth announcements, and such. Rochkind suggested a group policy that would cover both women, their husbands, and their children for about $12,000 a year. ''Don't buy the $22.65-a-month coverage for drugs,'' he advised. ''That's only worthwhile if you need a lot of drugs, and if you do, we're not going to sell you a policy.'' Weber complains that the only contact she ever had with her previous insurer was with the salesman who sold her the policy. When she later tried to get reimbursed for her son's hernia surgery, the company never answered her letters or calls. ''That must have been one of those fly-by-nights out of Fort Worth,'' says Rochkind. ''My office is only two blocks away. The only way I'm going to leave Galveston, God forbid, is if I die.'' There is no reason to doubt Rochkind's honesty or good will. Still, his power to help his clients is limited. The next call is on independent CPA Ann S. Masel, a longtime friend as well as a customer, who fears her premiums will go up because of her recent mastectomy. ''I have to pay whatever rates you charge,'' says Masel, exasperated, ''because no other insurance company will take me.'' Rochkind is apologetic but can do nothing. Managed competition would resolve Masel's complaint. She, Ahern, Weber, and the rest of Galveston's 59,000 inhabitants would buy their coverage through a so-called health insurance purchasing cooperative (HIPC), a sort of sickness club for people not covered by existing managed care networks. Bad risks would not be excluded or charged exorbitant rates, and the HIPC would buy care from the local network of hospitals and doctors that offered the best deal. An insurance company might be at the center of each network, but it would probably be a Cigna or a Prudential, which are already experienced in running managed care, rather than an American National. No more need for the ''administrative waste'' of sales calls like Rochkind's. ''I hope it doesn't work out like that, because I still think the individual agent can help people understand their coverage,'' says Rochkind, ''and I've made a semi-decent living at this.'' He declines to disclose his earnings, but a talented salesman in the region can earn $25,000 a year or more on health insurance alone. The health care industry shakeout, like its counterpart in defense, ultimately promises more economic gain than pain. Runaway health care spending is slowly eroding the competitiveness of U.S. companies and rapidly bankrupting the U.S. government. Once America constructs a medical system it can afford, huge sums that now pour into health care will be freed up. Some of that money might go to reduce the deficit or flow back to workers as higher wages or lower taxes. Some might be directed to other urgent social needs, such as education. A few decades ago education and health consumed about equal amounts of U.S. GDP. Now health is more than twice the size of education. Sometimes a society, like a person, gets healthier the less medicine it takes.

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