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.

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.

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.

(Obamacare and the economy / shutterstock)