By Wayne Winegarden
"Obamacare increases government regulations, increases taxes, and increases spending, but it never... [+]
In the wake of a landmark Supreme Court decision, President Obama’s signature policy achievement is safe, and the implementation of the Patient Protection and Affordable Care Act (“Obamacare”) will continue as planned. The U.S. economy is another story. Obamacare’s projected economic consequences were negative when the legislation passed in 2009, and they remain so today, increasing the likelihood that national economic growth will lag expectations, and budget crises at the national and state levels will persist.
The reason is simple: Obamacare increases government regulations, increases taxes, and increases spending, but it never addresses the central problems with the current health care system. That is, it neither improves health outcomes nor controls skyrocketing health care costs. At a time of trillion dollar federal deficits and state and local budgetary stress, the legislation burdens the federal and state governments (to the extent they choose to participate) with additional expenditures. According to the Congressional Budget Office, Obamacare will cost an additional $1.5 trillion through 2021, some of which may be financed by the states through higher Medicaid and other health programs. This $1.5 trillion is equivalent to an additional annual cost of $1,261 per U.S. household, or a diversion of 2.5% of the average household’s gross income.
Back in 2009, President Obama noted that “health care reform is not a luxury. It's a necessity we cannot defer. Soaring health care costs make our current course unsustainable. It is unsustainable for our families … It is unsustainable for businesses.”
And in this, he was correct. Medical costs have been growing at an unsustainable pace for far too long: over the past 20 years, overall consumer prices have risen a bit over 60 percent based on the Consumer Price Index. Prices for medical care grew nearly twice as much – 111 percent.
Obamacare’s fundamental flaw is its inability to “bend this cost curve” because it does not alter the incentives driving health care inflation. The consumers and suppliers in the health care market, like any other market, respond to incentives. And these incentives are established by the current third party payer system. This system creates adverse incentives for patients and medical providers by separating medical consumers from medical providers – it drives an economic wedge between them.
On the consumer side of the market, the wedge diminishes consumers’ incentives to monitor costs. In 1960, the private sector funded over three quarters of national health care expenditures, with individuals responsible for nearly one-half of the total costs through out-of-pocket expenditures. Today, the entire private sector funds only slightly more than half of all national health care expenditures, and individuals covered just over $1 of every $10 spent on health care. As consumers now bear only a fraction of the costs from any additional health care service, their incentives to control costs are significantly diminished.
On the supplier side, doctors and other medical providers receive no incentive to monitor costs, and they could face catastrophic penalties from lawsuits if they do not cover themselves by ordering enough tests.This tort liability threat is one of the most important disincentives for doctors to monitor costs. According to the American Medical Association, this factor alone adds $70 billion to $126 billion in additional health care costs per year.
Thus, the separation of consumers from suppliers blinds both patients and doctors to the cost of health care. Meanwhile the risks of litigation give doctors an incentive to run additional tests to limit their liability exposure. Government regulations and the third party payer system are also diminishing the market incentives to implement programs that would help eliminate waste, fraud, and abuse. Whether government or an insurance company pays the bills, the process diminishes the competition and patient feedback that are necessary to drive market innovation.
Further, experience shows that the government rarely competes on a level playing field with private companies and firms. Instead, it tends to tilt the field in its favor. Obamacare’s guaranteed taxpayer subsidies will empower the publically supported options to be priced at uneconomical levels in order to meet political goals, regardless of their economic merit or viability. This will further reduce the number of Americans with private health care insurance, increase government costs, and worsen the economic viability of the U.S. health care industry.
In fact, the combination of generous federal subsidies and what amounts to a new public insurance option will actually worsen the problem by reducing people’s incentives to monitor the costs of their own care. Health care inflation will, consequently, accelerate – unless, of course, the government turns to price controls and the associated shortage problems price controls create. The additional expenditures will likely add significantly to the $2.6 trillion spent on health expenditures annually without improving health outcomes or addressing the rising cost crisis.
Due to the higher expenditures, new taxes earmarked to pay for these new expenditures, and increased regulations, economic growth will suffer. Lower economic growth will lower tax revenue growth for the federal and state governments. The combination of lower tax revenue growth and higher government expenditures will burden government budgets at both the federal and state level.
For now, the Supreme Court’s decision last week ensures that the Patient Protection and Affordable Care Act remains the law of the land. The Supreme Court cannot re-write the economic consequences, however. And throwing more money and more regulations at the healthcare problem without addressing the fundamental drivers is a recipe for stagnation.
Dr. Winegarden is a Partner in the economic consulting firm Arduin, Laffer & Moore Econometrics (ALME) where he advises corporations, policy & trade associations, and government agencies on the business and economic implications from changes in economic trends and government policies. Dr. Winegarden is also a scholar at the Pacific Research Institute and a contributor to EconoSTATS. Dr. Winegarden received his B.A., M.A. and Ph.D. in Economics from George Mason University.
