Will ObamaCare Help or Hurt the Economy?

Ask almost any employer and there won’t be much doubt: the Affordable Care Act is likely to raise the cost of labor, discourage hiring and have a negative effect on the economy. Some economists are pushing back, however.

In 2011, David Cutler of Harvard testified that the Affordable Care Act would reduce average health care costs by about 5 percent by 2015. That would decrease the cost of labor for employers and increase nationwide employment. Cutler also organized and signed an economists’ letter to Congress asserting that “repealing the Affordable Care Act would produce job reductions of 250,000 to 400,000 annually.”

But how much of this push back is just politics, as opposed to real economics? Although Cutler is an able health economist, he’s not an expert in labor economics. Someone who is at the top of that field is University of Chicago economist Casey Mulligan, who took Cutler to task for ignoring all of the ways in which ObamaCare discourages hiring, discourages full time employment and discourages businesses from becoming large rather than small. At The New York Times economics blog he writes:

Neither Professor Cutler’s testimony nor the economists’ letter mentioned that the Affordable Care Act also creates explicit taxes on employers, subsidies for layoffs and various implicit taxes on employees with many of the same economic characteristics as taxes on employers.

Borderline

According to Mulligan’s calculations:

[T]he tax effects that Professor Cutler left out are about 10 times greater than, and in the opposite direction of, those he conveyed to Congress…If his estimate of the cost-savings channel is accurate, and I am right that the overall labor market effect of the act is about 10 times larger (in the other direction) than the cost-savings channel, we might then expect the act to contract the 2015 labor market by about 3 percent rather than expand it.

That’s a loss of 4 million jobs!

Mulligan lets Cutler off the hook on his claims that health reform will produce cost savings. I won’t be so kind.  Is it really credible to think that ObamaCare will reduce the cost of health care?

Consider that ObamaCare aims to insure an additional 27 million people. If economic studies are correct, once they are insured these people will try to double their consumption of health care. On top of that, millions of employees and their employers will be forced to upgrade their health insurance ― making it more generous (and more expensive) than it currently is. Again, more insurance coverage inevitably leads to more spending. Then there is a lengthy list of preventive services everyone is supposed to insure for, with no copayment or deductible. Even seniors on Medicare are affected. Although no serious scholar has asserted that it has any medical benefits, seniors are getting a free “wellness checkup” every year ― all of which takes doctors’ time and uses valuable resources.

What we are describing is a huge increase in the demand for care. But the Affordable Care Act does nothing to increase supply. This is virtually guaranteed to put upward pressure on prices. To the extent that prices are prevented from rising, it will create enhanced rationing by waiting. And almost anything patients and doctors do to circumvent the cost of waiting will also add to the money cost of care.

For example, an increasing number of primary care doctors are becoming concierge doctors. For a fee of about $2,000 a year, patients get same day or next day appointments, more time with the physician and someone who acts as their agent in dealing with other parts of a complex heath care system. Yet physicians who become concierge doctors typically replace a practice that sees about 2,500 patients with one that sees only about 500. So as concierge practices grow, the rationing problem becomes worse for everyone else.

To imagine one very extreme scenario, let’s suppose that everyone in America paid a fee to a concierge doctor in order to reduce waiting costs. All those concierge fees would increase the nation’s health care spending by one-fourth. Yet we would not have changed the doctor-patient ratio by one whit.

There are only two cost control features in ObamaCare and neither is very promising. First, the administration is spending millions of dollars on pilot programs and demonstration projects “to find out what works,” so we can go copy it. But the federal government has direct control only over what happens in Medicare. Even there, three Congressional Budget Office reports have concluded that the pilot programs aren’t working.

Plan B for ObamaCare is price controls. Absent any successful supply side changes, ObamaCare calls for draconian cuts in Medicare fees for doctors and hospitals ― a fact that has been totally ignored by the mainstream health care media. This by itself does not reduce total health care spending, however, because every dollar of reduced spending on seniors will be used to increase spending on health insurance for young people. Moreover, if seniors react by turning to concierge doctors and the like, total spending will surely increase. To make everything even more problematic, most Washington insiders think the spending cuts will never take place. Similar cuts in doctor fees were legislated in 1997, but Congress has postponed the reduction 14 times!

BTW, I know that health care spending has slowed, relative to historical trends. But the slowing occurred before ObamaCare was passed, it’s happening worldwide, and in any event, there is no reason to think it is because of the Affordable Care Act.

To be fair, Cutler has a rejoinder to Mulligan in which he argues that ObamaCare will have the following positive effects on the job market:

  • Easy access to health insurance eliminates “job lock” and frees workers to move to their most productive job or to start a business.
  • Greater access to health insurance encourages people on disability insurance to work more.
  • Also, there are the costs of workers missing work (absenteeism) or being less productive at work because they are ill.

Even so, these positive benefits are likely to be overwhelmed by the negative aspects of the law ― negative aspects that were never necessary in the first place if the only goal was to help the uninsured get health insurance.

Comments (21)

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  1. Bubba says:

    ObamaCare will help the economy of hospitals, and maybe even some insurance companies. However, it will harm the economy of workers themselves and taxpayers. Companies will also struggle under yet another tax on employment.

    • JD says:

      Right. Policies that manipulate market outcomes always help someone, but hurt far more.

      • Dewaine says:

        “Even so, these positive benefits are likely to be overwhelmed by the negative aspects of the law ― negative aspects that were never necessary in the first place if the only goal was to help the uninsured get health insurance.”

        I have a feeling that the targeted group will end up being hurt most, while “health care administration” will profit.

  2. JD says:

    “Mulligan lets Cutler off the hook on his claims that health reform will produce cost savings. I won’t be so kind. Is it really credible to think that ObamaCare will reduce the cost of health care?”

    We really should be using the logic test before expending money and resources on formalized testing.

  3. Dewaine says:

    “the administration is spending millions of dollars on pilot programs and demonstration projects “to find out what works,” so we can go copy it.”

    Treating “finding out what works” like a new direction is hilarious. What does he think we’ve been doing this whole time?

  4. Andrew Thorby says:

    Prognosticating can be fun however at this stage of the game the die has been cast and the chips will fall where they may. My only counsel to those predicting disaster is to have a little faith in the resiliency of the market. Remember, we started with the least efficient healthcare system on the planet – and not by a little bit. I am not too concerned about the impact of the ACA if for no other reason than it would be extremely difficult to actually make things worse than they were before passage of the act. Let’s just see how this plays out before we start pre-emptively dodging pieces of the sky.

    • Dewaine says:

      I can agree with:

      “least efficient healthcare system on the planet”

      but, not with

      “extremely difficult to actually make things worse”

      Nobody can deny that our current system has significant problems, but there is a long, long way to the bottom. Obamacare takes only the flaws and builds on top of them.

  5. Underwriterguy says:

    John, I don’t believe you have commented on the leveraging effect of the move to higher deductible plans. In the years of transition medical costs go down as consumers make better decisions spending their own money. Thus we have the “bent curve” of medical trend currently observed.
    But once most plans are high deductible if the underlying upward pressures of improved technology, drugs, consolidated hospitals and doc practices haven’t been mitigated the trend will spike and then resume its previous curve.

    • Devon Herrick says:

      @Underwriterguy

      I agree that savvy consumers can lower spending. But this is only the demand side of the health care equation. On the supply side, if enough patients have an incentive to be savvy consumers, providers will respond with competitive behavior. Savvy patients controlling more of their own health care dollars creates the incentives providers need to compete for patients’ business.

      Patients may demand more care as beneficial technology proliferates. The goal should not be to suppress innovation, it should be to make providers competitive so the technology they create is good value.

      I wrote about this in The Market for Medical Care Should Work Like Cosmetic Surgery. The market for cosmetic medicine has exploded in recent years. Yet, prices are stable. On page 8, notice the graphic on Lasik. The price has been stable despite advances in technology.

      • Underwriterguy says:

        I hope a market for general healthcare will develop as with Lasik, cosmetic and OP surgicenters. But if that evolution is not as fast as the transition to higher deductible plans, I fear the spike and return to higher medical trend. Consolidation of hospital and physician practices makes for a bigger gorilla with whom to bargain.

  6. Centrist says:

    “But the Affordable Care Act does nothing to increase supply”

    Nothing?

    Title V of the Act “…funds scholarships and loan repayment programs to increase the number of primary care physicians, nurses, physician assistants, mental health providers, and dentists in the areas of the country that need them most.”

    http://www.morssglobalfinance.com/obamacare-%E2%80%93-the-potential-hidden-benefits/

    • Devon Herrick says:

      The scholarships and loan repayment programs you describe only provide relatively small sums to students who are already in the system. I see nothing in the ACA that boosts medical residencies necessary to expand the number of physicians. Considering the number of foreign medical graduates that would like to practice in America, funding residencies would increase the supply of physicians more effectively than small scholarships and loan repayment programs.

      • Dewaine says:

        Right, and even still that would just be a half-solution. The best way to solve physician shortages is by allowing market prices.

      • Jimmy says:

        Totally! Just giving more aid encourages more out-of-the-country students. That would actually hurt our current situation, not help.

  7. Centrist says:

    What will be the effect on health care costs when all hospitals and doctors receive full payment from every covered patient? Won’t write-offs be reduced dramatically?

  8. DoctorSH says:

    John

    You write that Concierge docs will increase the cost of care.
    What I am surprised that you did not mention was that as Concierge or Direct Pay practices increase, free market competition will develop and bring the costs down.

    Docs that have the ability to see patients quickly lower the cost of care and prevent needless ER and hospital visits.

    When you talk about the “cost of care” , I think you should separate the cost to govt/insurance from the individuals cost.

  9. Ken says:

    Great post.

  10. Doctom says:

    Yes, Draconian cuts to doctors seeing Medicare patients. After all, we are responsible for a whopping 8% of Medicare expenditures. Wouldn’t want to jeopardize that 8 figure annual bonus to the CEO of BCBS of NC.

    The more that Medicare is cut, the fewer will be the number of docs willing to see Medicare beneficiaries.

    I see a lot of Medicare disability patients in my practice. A large percentage of them have no business on disability. I don’t see how Cutler can make the claim that more people will work instead of being on disability insurance. Its a freebie for the freeloader at the expense of the truly disabled.

  11. Charlie Bond says:

    Hi John,

    The absence of cost-based pricing rises again to bite us. What does any health care really cost–whether it is Obamacare, Romneycare or Aliencare? So long as the price of goods and services are infinitely variable and not tied to the cost of production, the projections of any and all economists are sheer speculation.

    So are we left with just the alternative of price controls? No. Your second option–innovation–is the free enterprise way out. The good news is that through gainsharing contracts, doctors, hospitals and other providers can take the reins and re-establish value-based pricing. By using medical informatics, providers can supplant much of the function of the health plans and begin to get the cost of caring for patient populatons back into perspective. Gainsharing contracts reward doctors and hospitals by giving them a portion of the money they save.
    By supplanting fee-for-service with appropriate gainsharing contracts physicians and hospitals can create a survival strategy that is forward-thinking, rather than whimsically wishing for the past.

    We are working with physicians, medical staffs and other organizations across the country to help create and advance gainsharing contracts that include quality incentives for providers as well as health and wellness programs for patients. Patients are the greatest predictor of both outcomes and cost. Expanding insurance benefits to them without imposing corresponding responsibilties for their own wellness and compliance with health care regimens will raise costs. So we have come up with an innovative free-enterprise approach based on gainsharing that is aimed at addressing the absence of cost-based pricing, while actively involving the patient in the value-setting process and incentivizing individual responsiblity.

    So all is not doom and gloom. Nor do we need to cloud the atmosphere with political finger-pointing. The truth is: the farther we can keep the politicians and bureaucrats away from our health care the better we will be. Fortunately, thus far, the government has had the wisdom to drop or defer things it can’t do. So let’s root for the little guys and hope that innovation carries the day.That’s the American way! And it is the way we are pursuing at the Patient-Physician Alliance
    Cheers,
    Charlie Bond

  12. David C. Rose says:

    John:

    Casey Mulligan is indeed the real deal. He doesn’t need my help making his points, but I can’t resist.

    There is another wrinkle that makes Mulligan’s points a fortiori. Firm-specific human capital is an important thing. Firms and workers together account for both firm-specific and non-firm-specific human capital investment. More of either increases productivity and these productivity gains are split between the firm and worker. The ratio of investment in firm-specific to non-firm-specific human capital with respect to any job is presumably reached in some optimal way and is therefore in some sense optimal.

    When workers go from full-time and therefore full-benefits employees to part-time employees, this will likely reduce incentives for both the firm and such workers to invest in firm-specific human capital. Less investment in either form of human capital by either agent reduces productivity, but having the optimal balance disturbed will reduce it even further if the original ratio was optimal.

    But that’s not all.

    Attachment to one’s place of employment helps foster trust, and trust improves for workers, firms, and society as a whole in a number of ways. Inducing firms to convert part of their full-time workforce into a part-time workforce reduces average attachment and therefore average trust. This could have far reaching effects on our culture with hard to predict long term consequences.

  13. Bob Hertz says:

    In Germany, every single employer large or small pays in 7% of payroll for health care. The employee pays another 7%.

    In America, every single employer pays 6.25% into Social Security, and again the employee matches that.

    Neither of these broad taxes has destroyed labor productivity or reduced the investment of human capital, to my limited knowledge. (I am far from a labor economist)

    The key is that each of these taxes are old and familiar. Also they started at lower rates and have been increased quite gradually.

    This makes me think that the problem with ObamaCare is a problem with the transition.

    Obamacare is actually rather timid in terms of an employer mandate compared to a true single payer plan. And yet it is initiating an ugly and uncertain transition.

    Going from an economy where employers have had the freedom not to cover workers, over to an economy where coverage is mandatory, is a stupendous transition. A fragile economy like ours may not be able to make the transition.