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ObamaCare's Symptoms Include A Prolonged Recession

Avik Roy | 10/26/2010
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Americans are deeply skeptical of ObamaCare for many reasons. Many are concerned that the law will deepen the federal deficit, and rightly so: the law’s spending commitments will grow far faster than the revenues generated from its tax increases. Still others worry, justifiably, about how the law will drive up the cost of health care and harm its quality.

But people have paid less attention to another important problem. The Patient Protection and Affordable Care Act will cause significant harm to an economy already reeling from a significant recession. A new report from Senators Tom Coburn (R-OK) and John Barrasso (R-WY), both physicians, draws attention to just this issue.

The 27-page report, entitled “Grim Diagnosis: A Check-Up on the Federal Health Law,” may come from two Republican senators who strongly opposed the new law. But all of the numbers they use in their report come from nonpartisan government agencies and think tanks.

The report is divided into nine sections, including one on the deficit, one on Medicare, and one on emergency room wait times. But its real impact comes from its discussion of what the law will do to the broader economy. “The health overhaul,” they argue, “threatens our nation’s economic recovery, increases costs, and reduces job growth.”

Increasing unemployment

The report contains four separate sections on ObamaCare’s impact on unemployment: one on the CBO’s estimates for job losses caused by the law; another on how forcing employers to pay for health insurance will incentivize them to hire less; one on how the law will reduce job opportunities for younger people; and one on how the law’s acceleration of rising health costs will squeeze employers.

In August, the Congressional Budget Office released their updated Budget and Economic Outlook, in which they estimated PPACA’s dramatic expansion of Medicaid would “encourage some people to work fewer hours or to withdraw from the market,” and that its subsidies of individually-purchased health insurance will reduce people’s incentives to make more money by working harder. (For example, if you make 400% of the poverty level, the government will subsidize your insurance by $7,830; if you make 401%, you will get nothing.)

Specifically, the CBO estimated that the law would shrink the labor market by an additional half-percent: equivalent to over 788,000 jobs. To put that in perspective, think about the fact that about 550,000 people work for GM, Ford, and Chrysler combined.

There are a number of other job-killing aspects of PPACA. The law’s 2.3 percent excise tax on medical device companies will force marginally profitable companies to lose money. A ban on new physician-owned hospitals has forced the cancellation of dozens of construction projects. Most significantly, the law forces all businesses with more than 50 employees to offer generous health insurance to every worker: an expense that will incentivize those businesses to hire exactly 50 people, while farming out the rest of their work to independent contractors and part-time employees.

A Harvard study recently described how an employer mandate to provide insurance would disproportionately affect lower-wage workers: “uninsured workers earn within $3 of the minimum wage, putting them at risk of unemployment if their workers were required to offer insurance.” It’s pretty simple: money doesn’t grow on trees. If you’re forced to spend more on each employee, you’re going to hire less of them. This is exactly what goes on in Europe, where the high cost of labor forces small businesses to hire less people, and charge more for their products.

As the Coburn/Barrasso report points out, this phenomenon hits the young especially hard. They’re the ones who are trying to break into a job market that is increasingly closed to them. They are the ones seeking the low-wage jobs that businesses will have no incentive to create. In addition, PPACA requires that private health insurance for the elderly can only cost three times what it costs for the young, even though most young people have negligible health care costs. “Some independent actuaries,” write Coburn and Barrasso, “estimate that premiums for the youngest third of the population could increase by as much as 35 percent under the new law’s tight age bands.”

ObamaCare’s proponents highlight a small-business tax credit that allows certain businesses to deduct some of their health insurance costs: but an infinitesimally small fraction of businesses are eligible for the credit. On the other side, the rising cost of insurance is squeezing both employers and employees.

“A Ponzi scheme of the first order”

At this point, there are only two camps of honest people: those who believe ObamaCare will blow up the budget, and that this is a problem; and those who believe that ObamaCare will blow up the budget, and that this is not a problem (because wealth redistribution is more important, and because the wealthy can be taxed more if needed). The Coburn/Barrasso report points out two underemphasized aspects of how the law will deepen our fiscal crisis: the CLASS Act and state Medicaid costs

When the Senate was debating the CLASS Act, a new assisted-living entitlement, Senator Kent Conrad (D-ND) famously called it “a Ponzi scheme of the first order, the kind of think that Bernie Madoff would have been proud of.” Baucus voted for it anyway. It remains one of the most alarming, and under-emphasized, problems with the new law.

The CLASS Act helped PPACA pretend that it balanced the budget. The new entitlement will collect premiums starting in 2011, but will only start to pay out benefits in 2016: hence, over the 2010-2019 window of CBO’s projections, the program will “reduce” the deficit. However, as Coburn and Barrasso note, the program will cost tens of billions of dollars in each ensuing decade:

CBO determined that the “CLASS program could be subject to considerable financial risk in the future if it were unable to attract a sufficiently healthy group of enrollees.” Unfortunately, CBO also found this is a likely outcome, saying “attracting healthy enrollees could be challenging for several reasons.” Because the law requires the CLASS program to enroll all eligible individuals who apply, CBO said it is “likely that some enrollees would be people who were unable to obtain coverage in the private market because of their poor health status.” So, with a higher percentage of the CLASS program participants consisting of individuals who are sicker and more needy—and therefore cost more to care for—CBO concluded the “relatively small enrollment would increase the risk of adverse selection and could undermine the long-run stability of the program.”

The law’s impact on state deficits is just as bad as its impact on the federal shortfall. Unlike the federal government, state governments can’t issue Treasury bonds to finance their deficits. Hence, every dollar that a state spends in excess of its revenues must be recovered either in higher taxes or lower spending in other areas. At the heart of the state-based fiscal crisis is Medicaid: the joint federal-state health insurance program for the poor. A recent report by Richard Ravitch, the Democratic Lieutenant Governor of New York, found that the government spends more than $50 billion on Medicaid in New York: nearly 40 percent of the state’s overall budget.

ObamaCare deepens this crisis by forcing states to dramatically expand Medicaid. As Sens. Coburn and Barrasso point out in their report, Texas alone estimates that the law will force them to spend an additional $27 billion on Medicaid from 2014-2023. Nationally, the state costs could exceed hundreds of billions of dollars: costs that weren’t included in the CBO’s estimates, because they aren’t paid by the federal government. These extra costs will force states to cut education spending, highway repair, and other poverty programs.

Repeal is urgent

There are some who believe that ObamaCare can be “fixed” or “restructured,” by taking out controversial provisions like the individual mandate. The Coburn/Barrasso report shows just how misguided this thinking is. The law is filled with less-noticed provisions that will prove to be just as harmful, if not more so, to the fiscal and economic health of the country.

Things will get worse before they can get better. PPACA can be repealed no sooner than 2013, two years after its implementation. Even if Republicans succeed in taking back the White House, the real battle over repeal will take place in the Senate, where Coburn and Barrasso reside.

Coburn and Barrasso have taken a leadership role in detailing the law’s significant flaws. Here’s hoping they can also unite a majority of the Senate around a better approach to American health care. Real health reform isn’t possible without repealing ObamaCare, but real reform remains critical: placing the Medicare and Medicaid entitlements on stable footing, and increasing the degree to which Americans control their own health-care dollars. It will be up to our physician-Senators, and their legislative teams, to turn these priorities into laws.

Avik Roy is an equity research analyst at Monness, Crespi, Hardt & Co., and blogs on health-care policy at The Apothecary.


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