Will Health Care Reform Kill or Mend the Economy?

The Patient Protection and Affordable Care Act/Health Care and Education Reconciliation Act (henceforth referred to as “Health Care Reform” or the “Affordable Care Act”) was adopted ostensibly to improve health insurance coverage, decrease health care costs, and improve health care quality. On the first point, most pundits agree. Health Care Reform should substantially boost coverage. The Congressional Budget Office estimates that it will increase coverage from an estimated 83 percent of U.S. legal nonelderly residents in 2010 to 94 percent by 2019. But, there is a wide range of opinion of the impact of the legislation on both cost and quality. For instance, the liberal-leaning Center for American Progress places the expected cost savings on the order of 1.5% per year which they attribute to the cost-reducing effects of prospective changes in payment systems, competitive effects of newly instituted health insurance exchanges, and technology improvements. Others on the political right disagree, arguing that it will further escalate costs because it entrenches a flawed third-party Fee For Service payment system, will result in short-run shortages because of inelastic health workforce labor supply, and is replete with tax and regulatory provisions that will increase costs.

Some of the most heated controversy but most meager investigation centers on the macroeconomic aspects of Health Care Reform. Simply put, what is the impact of reform on jobs and output? Implicit in the name of the Republican house sponsored Repealing the Job Killing Health Care Act Bill is that Affordable Care Act will result in enormous job losses, an especially unsettling prospect in the kind of jobless economic recovery we have been experiencing these last two years. On the other side of the aisle, House Minority Leader Nancy Pelosi has announced that Health Care Reform will “create 4 million jobs – 400,000 jobs almost immediately.” This figure appears to be loosely (very loosely) based on a Center for American Progress Study that shows 400,000 jobs created in 2014 under a best-case cost reduction scenario.

Somewhere in the middle is the Congressional Budget Office. The CBO Director, Douglas Elmendorf, has issued the terse statement that the “effects of the legislation on overall employment would be small.” However, net job figures are not provided to quell this swirling controversy. So, speculation and hyperbole continue.

One reasonable scenario is offered in a new paper by Juergen Jung and Chung Tran. They find that an Affordable Care Act type policy produces a “7 percent increase in aggregate spending on healthcare,” “steady state output decreases by up to 2 percent,” and the public experiences an “increase in stock of health capital.” They conclude that the “reform is socially beneficial as welfare gains are observed for most generations.” In sum, there are slightly negative macroeconomic outcomes but net social benefits.

Another way of looking at the Affordable Care Act is to focus on its fiscal effects. The Act was scored by the CBO to be deficit reducing at the time it was written. In the spring of 2010, it was estimated to provide $143 billion in savings over the period FY2010-2019 with much of the savings to occur earlier in the period and most of the spending impetus beginning in 2014 when Medicaid is expanded and the subsidized insurance exchanges open. There have been several modifications since that time (such as the repeal of new 1099 reporting requirements) that affect some of the particulars but you get the general gist. In the traditional Keynesian economic modeling world, deficit reduction is contractionary fiscal policy and has a dampening effect on output and employment.

Source: Congressional Budget Office

If these annual budgetary expenditure and revenue estimates are mapped onto the policy variables of a respected commercial economic model called REMI, the employment trajectory closely follows the budget trajectory (see this paper for further methodological details) with one exception. During the budgetary surplus years, employment losses associated with the act peak in 2013 with over 800,000 jobs lost. However, beginning in 2015 when the spending kicks in, jobs are added. This pattern continues even as the federal government continues to accumulate small budget surpluses and ends on 2019 with almost 236,000 more jobs than would have occurred otherwise. This figure is net employment and includes both industry winners and losers. The winners? Health care services industries see a gain of over 470,000 jobs and insurance carriers see over 39,000 additional jobs. There are also employment gains in the pharmaceutical and medical equipment manufacturing industries. But, offsetting losses occur in many other industries, including retail trade, construction, and services.

Why might this happen? Well, Health Care Reform significantly channels spending from general consumer goods and services to health care goods and services. Moreover, health care spending is almost entirely spent in the U.S. and has a strong U.S. supply chain. But, it displaces general consumption spending that has significant import leakages. Think of it as having features of a successful “Buy American” program.

Unfortunately, this analysis is limited in many ways. For one thing, it doesn’t fully account for some perverse labor market effects of the legislation. For instance, the effect of the employer penalty (“Play or Pay”) feature of Health Care Reform is similar to instituting a higher minimum wage. Since employers can’t shift the costs of health insurance to low wage employees (as they tend to do with the costs of benefits), they will employ fewer of them or shift from employing full-time workers to part-time workers. The Lewin Group places the likely magnitude of this reduction in quantity of labor demanded at 157,300 to 366,200. The Act will also have profound effect on labor supply. The Medicaid and insurance exchange subsidies will effectively increase some household incomes and increase effective marginal tax rates. Therefore, some individuals will elect to drop out of the labor market. The CBO estimates that the net labor supply effect will be to reduce employment by approximately 800,000 by 2021.

Health Care Reform has ramifications for many other variables that could affect the macroeconomy, but they are difficult to quantify given the current state of knowledge. Mentioned earlier was the interminable debate about the impact of Health Care Reform on health care costs, an issue unlikely to be resolved anytime soon. There are also questions about the business and state government administrative costs of implementing the tax and regulatory provisions. Lastly, expanded health coverage should make people healthier. Healthier people should be more likely to work, be more productive, and live longer. In the process, they should impose lower disability and workers comp expenses (but raise retirement costs). Unfortunately, little is known about the magnitude of these other effects.

Given the current state of the knowledge, however, a few things seem reasonably clear. Health Care Reform is likely to have a relatively small effect on the macroeconomy. But, it is more likely to be a modest negative than modest positive impact. Which brings us back to the Jung and Tran study. If the effect of Health Care Reform is to effectively “kill” some jobs but make many more people better off, is that necessarily a bad thing?