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Will Health Care Reform Hurt the Economy and Increase Unemployment?

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Document date: August 01, 2010
Released online: August 06, 2010


This paper examines the economic impact of health reform. The conclusion is that health reform is not likely to have a significant effect on the US economy or on employment. The changes in both spending and taxes generally have offsetting effects and are simply too small relative to the overall size of the economy to have much of an impact. The taxes on insurers and drug companies will be more than offset by new revenues from increased coverage. State and local governments should be beneficiaries as well as most small businesses. The effects will also turn fairly positive to the extent that the cost-containment efforts are successful.

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The Patient Protection and Affordable Care Act (PPACA) provides for a major expansion of health insurance coverage through Medicaid expansions and tax credits. The cost of the expansion is offset by cuts in Medicare payment rates and new taxes and penalties. Despite fears expressed by some in the political arena, health reform is not likely to have a significant direct effect on the U.S. economy or on employment. The changes in spending and taxes in health reform generally have offsetting effects and are simply too small relative to the overall size of the economy, to have much of an impact.

Over the six-year period, 2014?2019, the Congressional Budget Office (CBO) estimated net new federal spending on health care (over and above reductions in spending by Medicare and other government programs) to be about $439 billion.1 The projected gross domestic product (GDP) over this period is about $116 trillion; thus, new spending would amount to almost 0.4 percent of GDP. Over the entire 2010?2019 period, new spending on health care (net of reductions in current payments) would be roughly the same while the GDP would be $178 trillion; over this period, spending would be 0.2 percent of GDP. Using a different modeling approach and considering spending from all sources, the Centers for Medicare and Medicaid Services (CMS) actuaries estimated the increase in national health expenditures to be $311 billion over 10 years, less than 0.2 percent of 10 years of GDP.2

Offsetting Effects

This does not mean that there will not be important effects on individual sectors of the economy. The expansion of health insurance coverage will lead to an increase in spending ($938 billion over 10 years, mostly from 2014 to 2019) and demand for labor in the health sector. It should also increase the use of medical equipment, new technologies and pharmaceuticals, and will likely lead to wage and salary increases in the health sector. Health reform is partially financed through spending reductions in Medicare and other government programs ($511 billion).3 These reductions will have the opposite effect, that is, reduce the demand for labor and the purchase of services and equipment in health care sector. The net effect, however, will be positive, higher net spending in the health care sector.

On the other hand, the net new spending will be financed through various taxes on insurers, medical device and pharmaceutical manufacturers, and earned and unearned income of individuals with ncomes above $200,000 ($250,000 for couples). The increased taxes on health care providers and insurers could mean higher prices for drugs, medical devices and insurance premiums, which could mean reduced demand for drugs and medical devices and, thus, fewer jobs in those sectors. These effects are likely to be small, as discussed below.

PPACA also includes an excise tax on high-cost insurance plans; the new tax is expected to increase federal revenues by $32 billion in 2018 and 2019 and increasing amounts thereafter.4 The higher excise tax is likely to lead people to choose less comprehensive health insurance plans that presumably will have higher cost-sharing requirements than the plans people would purchase in the absence of the new tax. Thus, the government will either obtain revenue directly from the excise tax or from income taxes on the higher wages and salaries that will result as employers pay less for health insurance. The penalties paid by individuals who do not sign up for coverage and employers that do not offer coverage will yield another $69 billion in revenues.5 The increased taxes, penalties, and higher out-of-pocket expenses (from less comprehensive coverage) will reduce the discretionary income individuals and families have to spend on other goods and services, which could consequently reduce the demand for labor in various sectors.

(End of excerpt. The full brief is available in PDF format.)

Topics/Tags: | Economy/Taxes | Employment | Health/Healthcare

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