Health Spending and First Quarter GDP: What Happened?

A couple of months ago, I noted that the only thing growing in the stagnant economy in the first quarter was health spending. Further, another source suggested that most of that spending was from Medicaid, a welfare program. Such “growth” is not really good for the economy.

The final estimate of real first quarter Gross Domestic Product (GDP) has thrown everyone for a loop, reporting an annualized decline of 2.9 percent. It was a huge revision: The previous estimate was that first quarter GDP had declined by only one percent.

The huge error in the earlier figure was almost entirely driven by a poor estimate of the effect of ObamaCare by the Bureau of Economic Analysis (BEA):

The downward revision to consumer spending was mostly to services, especially to health care services. The revision to health care services reflected the incorporation of newly available Census Bureau quarterly services survey (QSS) data for the first quarter. The QSS data reflect the revenues of for-profit and nonprofit hospitals, physician offices, nursing homes, and other health care providers and the expenses of nonprofit hospitals and other nonprofit health care providers. Prior to receiving the Census QSS data, BEA used information on Medicaid benefits and on Affordable Care Act insurance exchange enrollments to prepare the previously published estimates of health services.

In other words, the BEA thought that ObamaCare enrollees would immediately start consuming lots of medical services. In fact, consumption of health services declined in the first quarter.

The revision in the health-care category was the largest in recent memory, said Nicole Mayerhauser, an official that oversees GDP statistics at the Commerce Department’s Bureau of Economic Analysis.

“Trying to initially estimate health care this first quarter was a very unique circumstance because of the rollout of the Affordable Care Act,” she said. “We made an adjustment from our normal methodology … [but] our assumptions ended up being too strong.” (Wall Street Journal)

And figuring out ObamaCare’s impact on the economy is only going to get more difficult:

Analysts expect the contribution of health care to the overall G.D.P. to be bumpy and unpredictable in the quarters ahead because of uncertainty about the law.

“Looking forward, the volatility in the measurement of health care services represents a risk to our G.D.P. forecasts,” Doug Handler, chief United States economist at IHS Global Insight, wrote in a note. “Since this volatility is not business-cycle related, its impact should be heavily discounted in assessing the general health of the economy.” (NYT)

Maybe it’s a conspiracy, like the IRS targeting nonprofits with names that sound like “Tea Party”. Tyler Durden at ZeroHedge thinks that the Department of Commerce has simply deferred billions of dollars of health spending to the second quarter, predicting that the second quarter’s GDP growth will be reported at over five percent. Presumably, this will help the President’s party in the November elections.

Should this news disturb those (like me) who believed that ObamaCare was attracting the sickest people to sign up, and drive up medical claims? Not really. Mark Gongloff at the Huffington Post notes that “we might not really have seen the full impact of Obamacare sign-ups on the economy yet, particularly as large numbers of them happened at the tail end of the first quarter, for insurance that actually couldn’t be used until April — the second quarter — at the earliest.”

However, what we need to remember is that the BEA’s GDP estimate is a set of accounts (and a poor one, according to Austrian-school economists), not a description of cause and effect.

Changes in the rate of economic growth drive changes in the rate of consumption (including health care), not the other way around. Recent research indicates that changes in GDP, lagged up to four years, explain about two thirds of changes in health spending.

So, ObamaCare is having an effect: It is creating uncertainty and increased government control of society, which holds down economic growth. In turn, that suppresses consumption, including health care. Although the government is striving mightily to transfer consumption from other goods and services into health care, it is not enough to overwhelm the current stagnation.

Those in the healthcare sector who cheered ObamaCare through Congress should have thought of that before they lobbied for it.

Comments (15)

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  1. Walter Q. says:

    “The final estimate of real first quarter Gross Domestic Product (GDP) has thrown everyone for a loop, reporting an annualized decline of 2.9 percent.”

    This estimate is quite alarming. This is showing the harsh adverse effects of ObamaCare on our economy. All spending has slowed and the only spending that hasn’t is Medicaid spending. This is dire news indeed.

  2. Thomas says:

    “Tyler Durden at ZeroHedge thinks that the Department of Commerce has simply deferred billions of dollars of health spending to the second quarter, predicting that the second quarter’s GDP growth will be reported at over five percent.”

    This is an interesting theory, and entirely plausible as well.

  3. Devon Herrick says:

    I get tired of hearing proponents of universal health care argue that it would somehow be good for the economy. Dumping one-fifth of our economic activity on health care is not good for the “economy” unless you work in the health sector of the economy.

    • Matthew says:

      Exactly. And it isn’t necessarily encouraging consumer spending, especially when Medicaid spending is a larger portion of those receiving health care.

  4. Buddy says:

    “ObamaCare is having an effect: It is creating uncertainly and increased government control of society, which holds down economic growth.”

    Yes ObamaCare is having an effect. Albeit, an adverse effect that can hold our economy hostage. The increase in health spending was so one sided that it held all other industries to a stand still.

  5. frank says:

    obviously the new law will change health spending and how we measure i – I’m not sure why that should be so alarming. Health spending and use of health services was inevitably going to rise as the population ages with or without the ACA.

  6. Steve says:

    “ObamaCare is having an effect: It is creating uncertainly and increased government control of society, which holds down economic growth”

    This is so very evident now: our country is grinding to a halt, and the administration’s policies (not winter, like the administration’s media supporters claim) are largely to blame. The ACA in particular is hurting employment, leading to the still unacceptably high U6 unemployment, which includes those who have stopped looking for work, as well as underemployed people.

    • Bill B. says:

      With the effects that ObamaCare is having on the economy, the U.S. will not be known as a super power for much longer, but as a nation that flew too close to the sun.

  7. Bill Huber says:

    When I get puzzled with economic data, I go over to FRED and plot some data. So if we follow Tyler Durden’s lead of plotting quarterly changes for health care expenditures and include the Real Gross Domestic Product series we get this graph,

    You can see that the quarterly change in GDP dwarfs the health care expenditures and it is hard to see much of a correlation between these two indices. Unless we are willing to believe that the tail can wag the dog, we have to conclude that the 2.9% decline in the economy was for economic reasons other than health care expenditures. The impact of changes in health care expenditures is still a minor factor in the GDP growth. The Affordable Care Act taxes are probably holding the economy back a little bit but if we want to grow the economy we have to do it the old fashion way by making things bigger, better, faster, or cheaper.

    • John R. Graham says:

      Luouise Sheiner’s research (cited in the post) shows that lags of up to four years in GDP change explain two thirds of the change in health spending. So, just comparing changes in GDP without including lags will not show much.

  8. charlie bond says:

    Hello Friends,

    For many years, I have talked about American health care being the biggest bubble in history. If one defines a bubble as a sector of the economy not tethered to reality, health care dwarfs all other bubbles we have known. That bubble is now bursting, and we are all in it.

    The undeniable imperative is that we MUST cut health care costs dramatically. But when we do so, we will be lowering the GDP by significant percentage points, risking a deflationary spiral that could trigger a new decline in our already fragile economy.

    I would suggest that the decline in health care spending may or may not be the effect of Obamacare, but it is undoubtedly the effect of higher deductibles, greater co-pays and cuts in coverage that new health plan policies now feature–both for employers and for participants in the exchanges.

    The country faces a perilous choice: If we do not reduce health care spending our children and their children will suffer a lower standard of living than we have enjoyed. In reducing those costs, however, we could be triggering a new economic downturn that could have the same effect.

    The good news is that there are strategies for avoiding those negative results, while achieving the positive results. Folks interested in such solutions and reforming health care from the grass roots up, not the top down, should feel free to contact me at

    Charlie Bond

    • John R. Graham says:

      In the short term, GDP growth would drop. However, it might not take long for resources to be redirected towards more productive uses. Thus, GDP would likely move to stronger growth after a few quarters, as fewer resources are politically controlled (as they are in health spending).

  9. charlie bond says:

    Hi John,
    Thank you for your comment. My analysis suggests that the necessary cuts in health care spending would save money primarily for the government, large multinational employers and global health insurers. Economists who are a lot smarter than I suggest that those savings, therefore, would not necessarily be re-plowed into the economy and that the effects of sizable health care spending cuts would be depressive. Unquestionably, the Rx for our country is deflation in health care, which, because of the size of that sector in our economy, means economic downturn–unless it is managed creatively to assure that patients receive the benefits of the savings thereby keeping the money at home and assuring its recycling into the consumer economy. The good news is that we can do that. We need to find ways to incentivize patient behaviors to engender those savings. Patient behaviors are the greatest predictor of outcomes and the greatest drivers of cost. If you, or any of the other august readers of this blog, are interested in how to cut health costs without destabilizing the economy, please feel free to contact me directly.
    Charlie Bond

    • John R. Graham says:

      Many agree that one third of health spending is “wasted”. Let’s say we cannot eliminate all waste, but a consumer-driven healthcare system with less government would cut costs 15 percent. That would be a little under half a trillion dollars! Or, $2,000 or so for the average household of four. That money would not disappear. People would save or spend it elsewhere.