Can Healthcare Reform Affect the Economy?

Published on 19 September 2009 by admin in General News


We’ve been getting mixed messages about the economy lately. GDP fell last quarter, but by less than expected. Retail sales rose in August by more than anticipated. The unemployment rate fell from 9.5% in June to 9.4% in July, but rose again to 9.7% in August. So it remains to be seen how quickly economic activity will pick up. However, a favorable indication is the stock market. The Dow Jones Industrial Average moved above 9,000 in July and continues to show encouraging signs. The stock market is usually a good indicator of the future. After all, the value of stocks represent not just today’s earnings, but the prospects of future earnings and returns on investments.

While some market analysts suggest technical reasons for this upturn, others point to a specific fundamental for the improvement . . . signs that the proposed healthcare reform will not be enacted. Healthcare spending accounts for roughly 17% of GDP, so it’s fairly evident that major reform is this sector will have a significant impact on our economy. And current proposals before Congress call for massive changes in the delivery of healthcare and of health insurance.

Present proposals mandate certain types of policies, establish an option subsidized and/or run by the government, place insurance mandates on employers and individuals, set prices and coverage, and raise taxes to pay for it all. Substantial changes would occur in who buys what type of insurance products, in the kind of healthcare services provided, and the cost to companies and individuals. This would affect the earnings of most firms, thus influencing their stock prices and the stock market.

The uncertainty alone about how healthcare reform will shake out is likely to stifle the stock market. However, the current reform proposals go beyond the uncertainty about them . . . they would have overall negative effects and the prospect of non-passage is a boost to the economy.

One issue with present proposals involves cost. The government plan requires tax money to support it. The Congressional Budget Office estimated this cost at higher than what its proponents wanted. Thus, the plan requires tax hikes, either on individuals or firms. So, consumers will pay for insurance either through premiums or through taxes . . . there are no free lunches. And the health care taxes on employers may discourage employment and stifle economic growth.

Also, a portion of this added tax burden likely affects state budgets. Health care reform proposals call for a large expansion in Medicaid. State taxes pay for a sizable portion of Medicaid. This program’s expenditures have increased in Kentucky at an average annual rate of approximately 9 percent from 2003 through 2008 and have risen sharply in other states, too. Tax hikes at the state level are the likely outcome.

Another issue is choice. With a government subsidized plan made available, it will make it difficult for private options to remain viable. More employers will find it less expensive to cease offering a healthcare plan, putting their workers into the government option. Fewer private options mean less choice for the health insurance/healthcare consumer.

Also, the proposed government option comes with minimum-level mandated coverage. Some consumers want less than the amount of coverage mandated. Likewise, in the interest of “cost control,” the government plan would place limits on allowable treatments. Some consumers want more coverage than this.

Proposals call for the government plan to establish reimbursement rates for physicians and services near Medicare rates, which presently are so low that many health care providers don’t want to take on more Medicare patients. Thus, using this payment system on a government plan means enrollees facing limited choices for doctors.

The prospect of higher taxes, higher employment costs, and the potential for less choice all put a damper on consumer and business confidence. So while numerous factors influence stock prices, it’s quite plausible that proposed health care reform would stymie the market and the likelihood of it not happening would provide a boost.

A much better boost to the economy and consumers would come from health care reform proposals that encourage more coverage at lower prices without massive disruption, taxes, and spending. A simple but important step in this regard would equalize the tax treatment of individual and employer-provided health plans. This would invigorate and deepen the market for individual insurance, providing consumers with more choice for plans they can keep even with a job loss. Another simple step would eliminate state and federal policies that limit competition between health insurance companies and among health care providers.

These two steps alone would induce more coverage, including those with lower incomes who might otherwise receive Medicaid and without massive government intervention and cost.

by John Garen, Gatton Endowed Professor of Economics, University of Kentucky
September 8, 2009

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