Health Plan May Hobble Economy Recovery

Thursday, 01 Apr 2010 09:17 AM

By Patrice Hill

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While President Obama's health insurance mandate on businesses is being slowly phased in to prevent any immediate damage to the economic recovery, it nevertheless poses an obstacle to his overarching goal of creating jobs and could end up adding to spiraling medical costs rather than controlling them.

Economists not connected with either political party expect the new law to intensify the boom in health care spending - it already is the only major business sector that managed to grow during the recession - while adding to the reluctance of millions of businesses outside of health care to take on new workers because in the future they must provide costly and comprehensive medical benefits that previously were optional.

Mr. Obama signed the measure into law at a time when optimism was growing that the massive 8.4 million in job losses spawned by the recession might be coming to an end, so its effect on employment will be closely watched.

"Businesses will probably remain cautious when it comes to hiring," said Harm Bandholz, an economist at Unicredit Markets. "They now face the certainty that their labor costs will increase in coming years."

Companies with between 50 and 100 employees will be hit the hardest, he estimates, as they currently provide only about half their workers with health insurance and are not likely to be able to fully offset the cost of providing insurance using the tax credit implemented by Congress.

But because the smallest businesses - those with fewer than 50 employees - were exempted from the mandate and the full force of the law will not go into effect until 2016 for larger businesses, the legislation turned out to be "less onerous than many people feared," said John Silvia, chief economist at Wells Fargo Securities.

He predicted "it will have relatively little impact on economic conditions over the near term" because of the gradual phase-in over several years of major provisions such as the mandate on employers and tax increases on the wealthy.

But economists largely scoff at Mr. Obama's claim that the measure will reduce the rapid rise in health care costs and help close gaping federal budget deficit.

"It is tilting at windmills," said Mr. Bandholz. "Health care expenditures are still expected to skyrocket in the coming years" as the measure does little to deter people from spending more on health care and will feed the escalation of health care spending fueled by the retirement of the baby boom generation.

"There is little evidence the new health care law will hold down the price of health care," said Mr. Silvia, who noted that the measure largely shifts costs from lower-income consumers to wealthier ones who would pay more in Medicare taxes.

He expects health care providers and future congresses to balk at the large projected cuts in Medicare spending - a major source of $511 billion of purported cost savings that have proved difficult to carry out in the past - and he predicted that "the extended phase-in of the program will likely lead to incessant political pressure to expand benefits and scale back the tax hikes."

"Unfortunately, the history of massive social spending programs is that they tend to grow larger and larger over time," Mr. Silvia said.

David Kelly, an economist at JP Morgan Chase, said the measure is likely to increase health care spending and cost pressures, rather than reduce them.

"This bill expands demand without much effort to rein in costs," he said. "A combination of federal subsidies and mandates will increase the pool of insured, and while there are many constraints preventing insurance companies from limiting coverage, there are few which limit how much they can charge for it."

Not included in the legislation were measures that had the potential to more forcefully rein in costs, he said, such as "meaningful malpractice reform," a reduction in length of drug patents, limits on health care procedures in the last year of life, competition of insurance companies across state lines, and incentives for consumers to be more cost conscious and health conscious.

"For the most part, this bill moves away from, rather than towards, the principles of market economics" and is unlikely to reduce the record share of economic output devoted to health care, he said.

"It may be that America as a society ends up spending more on health care" under the plan, he said. The main compensation for that is it will feed robust growth in health care jobs, which are "still some of the highest-skilled and best-paid jobs out there."

Marjorie Baldwin, a health care economist at the W.P. Carey School of Business at Arizona State University, expects the measure to "cost way more" than the $938 billion over 10 years estimated by the Congressional Budget Office.

"We'll definitely pay more for health care, either in taxes or outright for the services, because we have to subsidize the health care of more people," she said.

Ms. Baldwin expects the legislation to produce unintended consequences, such as "some form of rationing" as doctors and insurers strive to serve 32 million more people gaining coverage under the plan even as they treat current patients.

Economists were surprisingly bland about the impact of $420 billion of tax increases on wealthier taxpayers and individual businesses such as tanning salons and drug companies.

"It's not like we haven't been here before," said JP Morgan's Mr. Kelly. By subjecting investment income for the first time to the Medicare tax for people earning more than $250,000 a year, he said, the bill will raise the effective maximum tax rate on capital gains and dividends close to their averages over the past 40 years of 24.7 percent and 44.6 percent, respectively. But he dismissed the potential impact on economic growth.

"Despite dire predictions, it's not clear that health care reform will really slow economic growth that much," he said. "The economy is quite capable of staging a full cyclical recovery" before the tax increases and other more onerous provisions are phased in.

Mr. Silvia predicted that the higher tax rates on investment income will create an industry of "tax-avoidance projects" and "lead to modestly lower investment throughout the economy." New taxes on medical devices and drug manufacturers also "could lead to less innovation and product development," he said.

© Copyright 2014 The Washington Times, LLC

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