By David M. Cutler | January 7, 2011
Download this memo (pdf)
The imminent effort in the House of Representatives to repeal health care reform is a major step in the wrong direction if promoting economic recovery is job one.
The new House leadership proposes to repeal the new health care reform law formally known as the Patient Protection and Affordable Care Act of 2010 and the subsequent Health Care and Education Reconciliation Act of 2010. That combined legislation guarantees health insurance coverage to all Americans and promotes significant cost reductions in public and private medical care programs. It is the culmination of 70 years of effort by Democrats and Republicans alike.
A successful repeal of health care reform would revert us back to the old system for financing and delivering health care and lead to substantial increases in total medical spending. The consequences of this spending increase would be far reaching. It would hurt family incomes, jobs, and economic growth.
Repealing health reform would:
- Increase medical spending by $125 billion by the end of this decade and add nearly $2,000 annually to family insurance premiums
- Destroy 250,000 to 400,000 jobs annually over the next decade
- Reduce the share of workers who start new businesses, move to new jobs, or otherwise invest in themselves and the economy
- This memo will review these effects in more detail with a particular focus on jobs.
High medical spending harms employment and economic growth
Before getting to the effects of repeal let’s look at how health costs affect the economy. Health insurance costs are a major issue for Americans. Family health insurance premiums have increased 80 percent in the past decade after adjusting for inflation, while median income has fallen by 5 percent. This is among the reasons why American families are increasingly uneasy about the economy. Businesses are worried as well. Small businesses have consistently ranked the cost of health insurance as their number one problem since 1986. Finally, rising medical costs are the major contributor to the long-run federal deficit, and they hamper state and local governments, too.
These costs affect four aspects of economic activity. First, increasing costs reduce net income for workers. The increase in the premiums that employees pay for coverage is most noticeable, but family income is affected in other ways as well. The first response of employers to rising health insurance costs is to reduce salary increases. Salaries for high-income workers have grown less rapidly than productivity as health insurance costs have accounted for a growing share of total compensation.
Less rapid growth of wages is not possible for all workers—many of whom have already experienced stagnant or declining take-home pay. For those workers the only viable response to rising medical costs is reduced employment—both involuntary part-time work and layoffs. Several studies show that health insurance costs and employment are negatively related.
Neeraj Sood, Arkadipta Ghosh, and José Escarce recently compared employment growth across industries in the United States that differ in how likely they are to provide health insurance. They compared employment in the same industries in the United States and Canada, where medical costs are lower and not paid for by businesses. The study found that every 10 percent increase in excess health care cost growth (cost growth above GDP growth) led to 120,000 fewer jobs. In other words, the high and growing cost of health care means that American firms that offer health coverage create fewer jobs than Canadian firms who need not offer these benefits. These results are consistent with a recent study by Katherine Baicker and Amitabh Chandra, as well as estimates from the president’s Council of Economic Advisers.
Beyond the impact on employment, high health insurance costs discourage long-term investments in economic growth. Fear of losing health insurance deters people from moving to new entrepreneurial jobs, from retiring when their health deteriorates, or from switching to part-time work as family needs arise. In the public sector, high medical spending crowds out investment in education, transportation, and electronic infrastructure, which translates into slower growth over time.
Health care reform aims to bring rising health costs down, but repealing it would do the opposite and make the above problems worse. The alternative proposals conservatives are offering would lead to continued cost increases as well. I focus primarily on how employment would be affected by health care repeal in this analysis. But the other effects of repeal on the economy are certainly important.
For the full report, click here.
To hear audio of the media call earlier today where Rep. Rosa DeLauro, David Cutler and Neera Tanden discussed the findings of this paper, click here.
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