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Health care bill economics
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One topic discussed in these pages is how government intervention does not provide the stimulation to resuscitate a moribund economy. Government itself has little to offer an economy since it exists only through taxation and borrowing. It is a cost to the economy, a necessary cost but still a cost. I detailed Government’s true role in the economy in this article. Until our elected leaders fully understand this concept we will continue to simply move things in the economy from one place to another and pay for the privilege.
While the health care bill circulating in Congress does not provide direct economic stimulation, its effects will be anathema to economic growth. Government spending and debt are at record levels and yet this bill creates a new middle-class entitlement designed to expand over time. Once government awards this entitlement, repealing it will be quite difficult. Taxes will no doubt need to increase to cover the spending associated with the dramatic expansion of government control of health care, despite pronouncements that this program will be deficit neutral. Economically speaking the imposition of the health care plan creates a hazard for the insurance industry and the government itself due to the circumvention of higher premiums for more risky patients. Imagine automobile insurance for teen drivers being equal to those married over 25. Yet, this is the sort of hazard introduced with universal health care.
The Congressional Budget Office (CBO) estimates the program cost of $1.055 trillion. Historically speaking, we can rest assured these estimates will be low. Much of the spending will result from government-run “exchanges” where people earning between 150% and 400% of the poverty level ($96,000 for a family of four in 2016) can buy coverage at highly subsidized rates in a tiered fashion. For families on the lower end of the economic spectrum, the government will provide higher subsidies (93% for a family with $42,000 in yearly income). The aforementioned benefits would be offered for those employers not providing insurance or for small businesses with 100 or fewer workers. While this benefit limitation could contain program costs, I wonder what will happen as more employers opt not to provide coverage when government is doing this for them (more on this later in the article) ?
Also affected are existing government health care programs. Medicaid is one program expanded to cover those within 150% of the poverty level implying an increase of 15 million people on this program. The implied cost of this expansion will be $425 billion. Conceived in 1965 to cover poor women, children and the disabled, Medicaid will expand beyond its intended boundary. Unlike Medicare, the Federal Government and the states share funding for Medicaid. Even though the plan is for the government to assume a greater share of this funding, the states will nevertheless experience an additional burden of $34 billion. Since states have no money for this, expect further cutbacks in state-provided services or more dollars coming from Washington. Since Washington does not have this money, more borrowing is in the offing.
Nevertheless, even Washington has its borrowing limits. The Congressional health care bill proposes raising the money for this program by cutting into Medicare and through additional taxation. Medicare cuts will come from tightened payments for doctors and hospitals and possibly gutting Medicare Advantage. The House bill endorses a plan for $572 billion in new taxes funded by an increase of 5.4% on joint filers earning over $1 million or $500,000 for single filers. Affected adversely will be small businesses; those organized as Subchapter S or Limited Liability Corporations (LLC). Another tax plan will penalize business 8% of their payroll if they do not offer insurance or pay at least 72.5% of their employees’ premiums (in reference to my earlier comment on employers wanting to bail out). For those thinking that they do not need to buy health insurance, the bill plans on taxing 2.5% of adjusted gross income in the future.
Once in place, the expansion of benefits will be always be a temptation for politicians eager to please more constituents. However, as the unfunded liabilities continue to increase, the system will have to make more decisions based on containing costs. This is where the “health choices commissioner” wields their power by restricting payouts to service providers and perhaps even mandating premium levels to private insurers.
From the standpoint of economics, the plan is another, this time more subtle, government intervention in the markets. While the effort to provide universal health care is a noble effort, the cost side of the equation and the unintended consequences will diminish health care economics and provide yet another wealth transfer mechanism fraught with peril.
Jim Mosquera publishes The Sentinel Economic and Financial Newsletter.
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