Health Reform and Employment: A One-Year Update

The Affordable Care Act is 1 year old today, sufficient time to gauge some aspects of the law. A ruling on the individual mandate—whether it is constitutional to require individuals to purchase health insurance or pay a fine—is still some time off, but the economic impact of reform is better understood. Several recent studies highlight the tradeoffs and provide estimates of the effects.

Financially speaking, there are two parts to the health reform law: a combination of tax credits and Medicaid expansions known as “universal coverage provisions” that are designed to get all Americans access to affordable health care; and a host of reforms aimed at making the medical care system deliver higher-quality care at lower costs. The first of these, the universal coverage provisions, will affect both labor demand and labor supply in many different directions. Expanded insurance coverage will increase demand for health care workers, while reductions in Medicare and Medicaid spending will lower demand. Universal coverage will increase the ability of workers to change jobs or leave the labor force entirely, while reductions in costs for small firms and some large firms will boost employment there.

The net effect of these various provisions is uncertain but is likely to be small. The Congressional Budget Office estimates that health reform would reduce labor supply by about half a percentage point, largely by allowing workers who are in the labor force primarily to receive health insurance to leave the workforce. A recent study by the Urban Institute, in contrast, estimates little net employment effect from these various provisions taken as a whole.

The real game changer on the employment front is the attempt to fundamentally change the delivery of medical care to make it more efficient and less costly. That such a reform is possible is not in doubt. Experts from across the political spectrum routinely conclude that one-third or more of medical spending is unnecessary. The Affordable Care Act goes after this waste in a number of ways by:

  • Re-orienting Medicare payments away from pay-for-volume and towards pay-for-value
  • Creating an Innovation Center in the Centers for Medicare and Medicaid Services and an Independent Payment Advisory Board to keep Medicare state-of-the-art
  • Stressing prevention, not just acute treatment, in medical practices
  • Providing incentives for high-cost private health plans to lower their spending

The impact of eliminating the waste inherent in the medical practices these reforms target will be profound.

Making medical care more efficient would lower business spending on health insurance and cut required future increases in taxes, which in turn would lead to significant increases in job creation. My research shows that improving the productivity of the medical sector by just 1 percent to 1.5 percent per year would create 250,000 to 400,000 jobs annually over the next decade. Jobs would be created in virtually all industries with the exception of health care, where more efficient production should allow for some reduction in administrative staff. The president’s Council of Economic Advisers used a different methodology but reached a similar conclusion, and the Urban Institute study by John Holahan and Bowen Garrett agrees with this assessment, though they do not provide a jobs number of their own.

One can debate whether the spending reduction associated with successful reform will be bigger or smaller than this amount, and thus whether the job creation that results will be at the high or low end of this estimate. Pessimists think this estimate is too high, but many researchers, business groups—among them the Business Roundtable—and health care groups such as the American Medical Association and the American Hospital Association think it is not optimistic enough.

Regardless of the exact number, there is no debating the fundamental issue: If we control medical costs, the economy will do better. And the Affordable Care Act gives us many tools to do so.

So, here is a birthday wish for health reform: May we focus less on forecasting legal decisions about the individual mandate, and turn our attention to how we can work together to make medicine safer, easier to use, and less expensive.

David Cutler is a Senior Fellow at the Center for American Progress and is the Otto Eckstein Professor of Applied Economics in the department of economics and Kennedy School of Government at Harvard University.

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