Obama administration health care reform and economic sustainability

Economic Policy -- Health Care

Health care reform looms as one of the major initiatives of the Obama administration. Many economists have stated their case for health care reform. Paul Krugman (2009) claims that the cost controls on Medicaid will save the U.S. from a budget crisis. His views have been supported by a range of well-known economists who also feel that the cost control elements of health care reform are the most critical, and that the balancing of these efforts with the benefits of health care reform is indeed the prescription for a stronger America (Rampell, 2009). The President's Council of Economic Advisers has also agreed on this point (Romer, 2009). Furthermore, there is reason to suspect that the high cost of health care is costing America jobs that are sent overseas, forcing Americans to stay in jobs that do not make the best use of their abilities to maintain insurance coverage, and stifling entrepreneurs (Sullivan, 2009). So what, then, is the challenge with respect to health care reform?

The challenge is simple. The costs of health care are growing at a much faster rate than the economy (Leonhardt, 2009). The aging of America's population, spiraling drug costs and other microeconomic factors are driving the cost of health care skyward at an unsustainable rate. Americans are facing a situation where they receive fewer health care benefits and see their wages stagnate as employers scramble to contain the cost of health insurance. So while the government has an economic imperative to bring about health care reform, it also faces a significant challenge in paying for it. In order for health care reform to truly benefit the American economy, it must be structured in such a manner that it pays for itself, not just in the short run but also in the long run (Leonhardt, 2009).

The Deficit and Debt

The U.S. budget deficit for the fiscal year ended September 30 hit $1.4 trillion, or 9.9% of the GDP. The deficit for 2008 was $459 billion, so the 2009 figure represents an increase of 205% in one year. A multitude of factors contributed to this increase in the deficit, including the ongoing wars in Iraq and Afghanistan and approximately $260 billion from the stimulus package. The only bright side to the deficit picture was that the low interest rate environment reduced the amount of interest paid on debt decreased 23%.

This deficit is one of the reasons why it is imperative that health care reform pay for itself. The debt in 2008 was 37.5% of GDP, or approximately $5.4 trillion. The current deficit will add $1.4 trillion to that figure, bringing the debt to $6.8 trillion, or around 47% of GDP. That figure, as bad as it sounds, is by no means unsustainable. Many industrialized nations, including Japan, Canada, Singapore, Germany and the United Kingdom all have higher debt levels. The U.S. level was 65% of GDP in 2004 (CIA World Factbook, 2009).

So it is not the level of debt per se that is the issue, but the underlying causes of the debt. It is the rapid rise in the costs of health care, borne by government through Medicare and Medicaid, that raises the specter of the nation being unable to address the problem in the future. Adding $1.4 trillion to the debt load annually may not be realistic -- there will not be major stimulus packages every year -- but even at the 2008 deficit level, the U.S. will find itself among the world's most indebted nations in just five or ten years.

How to Pay for Health Care

Among those who agree that health care reform is needed, there remains disagreement as to how reform will be funded. The initial concept of health care reform funding is that the federal government will be able to extract cost savings in order aspects of health care. For example, cuts are expected to Medicare, and these cuts will offset the cost of the public option. These savings are now viewed as likely to be insufficient to pay for health care reform.

In addition, there is question as to whether or the government will be able to extract the types of cost savings they anticipate. As rapidly as health care costs are rising in the United States, they are rising more rapidly in other countries, even countries with socialized medicine. Government control of health care, therefore, is far from a perfect precursor to cost control (Mandel, 2008).

Health care costs are rising faster than GDP. The government, therefore, cannot simply increase taxes in order to pay for reform. The tax rate would have to increase at a level to match the increases in health care costs. This means that any tax to help pay for health care reform will fail in one of two ways. It could fail because it would escalate annually, which would make it politically unviable. Or it could fail because after a few years of covering the costs, it would end up falling behind sooner or later (Leonhardt, 2009).

In addition to cost controls, health care reform is expected to have an impact on revenues. The economic growth that results from health care reform and its reduction of the competition disadvantages currently faced by American companies will provide some additional tax revenue. However, this revenue is not going to cover the cost of the program.

To this end, the government views the solution in terms of policies that curtail health care spending growth. The group of 23 economists who weighed in with their recommendations (Rampell, 2009) has some ideas to offer. The first was an excise tax on high-cost insurance plans. This plan is expected to curtail growth in premiums. However, this is unlikely. Insurance companies, when faced with an excise tax, will either raise premiums higher in order to finally reach a point where their profit point is reached.

The economists also posited that the excise tax will compel employers and health plans to redesign the plans in order to bring premiums down, thereby increasing wages. Employers are already curtailing plans in order to cut costs. This trend would have continued without health care reform. Thus, it is somewhat far-fetched to calculate all such cost savings as incremental to health care reform. Additionally, it is unlikely that any cost savings extracted from health care plans will be passed on to workers in the form of wages. To this point, firms are negotiating reduced benefits only to maintain health care costs. Companies are merely trying to break even, not increase wages. The Senate Finance Committee believes that the excise tax would result in a $300 billion increase in take home pay over the next decade.

Medicare savings are another core of both the President's plan and the plan of the group of economists. Yet, neither has a concrete plan for driving these Medicare savings. The program is complex. Finding savings will be a challenge, particularly in light of the aging U.S. population and the impact it will have on the number of Medicare beneficiaries.

Overhaul?

If health care reform is of critical importance for the health and solvency of the United States government, but conventional means of paying for the program are hopeful at best, what options remain? The current health care reform plan may fail simply because it doesn't address the core problems to a sufficient degree. Indeed, even socialized health care systems such as that in Canada are facing the same core underlying problem. Health care costs are rising too quickly.

A system overhaul is likely what is needed. Costs escalate because health care has become more technologically complex. The specialized knowledge and skill that it takes to develop drugs and deliver treatment come at a high price. Drugs are an especially significant problem. The high cost of prescription drugs, however, does not just derive from the expertise to develop them. Drug companies receive patent protection for drugs that allows them to charge monopoly rents. This is a distortion in the market, one that the government has determined to be socially favorable. The cost, however, has reached the point where drug costs are also socially unfavorable, particularly if they lead to an erosion of America's credit standing.

Curtailing drug costs may not be politically straightforward, but the economics of it are. The monopoly rents can be capped. Governments in many countries cap drug costs and perhaps the public option is tended to give the U.S. The same power. There may be some quid pro quo for the drug companies -- extending the life of patents, more support for orphan drugs or a streamlined FDA approval process that lowers the costs of development -- but capping drug costs goes a long way to capping the cost of health care. There are other ways as well. A cap with no compromise could be initiated. Drug companies will be faced with either accepting lower monopoly rents or finding ways to reduce their costs. Many industries have gone offshore and if that is the fate of the pharmaceutical business then so be it. Pharma isn't going anywhere of course, but by reducing the impact of the market distortion on prices, drug cost increases can be stabilized. Will this stifle innovation? That is debatable, since drug companies can easily adapt to lower profits -- they make those same capped rents in Europe and Canada and still find ways to make money. But even if it did, that is a social cost, not an economic one.

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