Macroeconomic Implications of U.S. Healthcare Reform

Introduction: Healthcare Costs and Macroeconomic Performance

There are overwhelming connections between healthcare costs and the macroeconomic performance of the U.S. economy. The impact of the healthcare industry on macroeconomic performance is evident from the fact that in 2009, healthcare expenditure in the U.S. amounted to 18% of the country's gross domestic product (GDP). It was also estimated that, should healthcare costs continue to grow at historical rates, 34% of U.S. GDP would be composed of healthcare spending by 2040 (Whitehouse, 2009). The major sources of funding for healthcare costs are the federal, state, and local governments. Medicare is a healthcare program that subsidizes healthcare for citizens above 65 years of age. Medicaid subsidizes healthcare delivery for people below a certain income level. Approximately 50% of healthcare expenditure is borne by governments at the federal, state, and local levels. It is also estimated that Medicare and Medicaid spending by federal and state governments will rise to 15% of GDP by 2040 (Whitehouse, 2009).

Thus, any reform agenda for the healthcare industry is bound to have major implications on the macroeconomic front of the U.S. economy. The major aims of healthcare reforms are to reduce costs related to healthcare delivery and to mitigate the impact of an aging population and demographic shifts. Healthcare reforms therefore aim to ease government deficits originating from healthcare spending, improve industry efficiency, and positively affect the macroeconomic indicators of the U.S. economy. This paper discusses some of the key macroeconomic implications of healthcare reform in the United States.

Decreasing Healthcare Costs to Reduce Budgetary Deficits

The federal and state governments of the U.S. bear more than 50% of Medicaid and Medicare expenditures (Leonard, 2012). According to 2011 statistics on the U.S. federal budget, 21% — nearly $769 billion — of the federal budget was spent on Medicare and Medicaid programs. A rapid shift in demographic trends and an increased percentage of healthcare spending make Medicare the most expensive federal healthcare program. The number of people retiring from the labor force has increased substantially due to the retirement of baby boomers. Statistics indicate that spending on healthcare has increased more rapidly than inflation for healthcare costs.

The President's Council of Economic Advisers made a detailed presentation to the White House indicating that reforming the healthcare system would allow the U.S. government to yield 2% higher GDP compared to a baseline case in which no reformation of the system is undertaken. The committee also suggested that a full overhaul of the healthcare industry could increase U.S. GDP by 8% more than the baseline scenario of no reforms. The government's budgetary deficit would also decrease by 3% of GDP relative to a situation in which no reforms are introduced.

The percentage of expenditures on hospital care remained above 36% during 2007–2009. The Centers for Medicare & Medicaid Services estimates that national health spending during 2012–2022 will grow at an average of 5.8% per year — approximately 1% more than the estimated annual growth of U.S. GDP. In 2014, healthcare spending growth was estimated at 6.1%, higher than the GDP growth rate. The Obama Administration introduced reforms such as private insurance coverage for 11 million Americans in 2014, which helps reduce government spending on healthcare subsidies through Medicare and Medicaid. The Affordable Care Act (ACA) also enables a greater number of Americans to register with insurance companies, increasing out-of-pocket spending on health and encouraging better health management. As a result, during fiscal year 2013, federal, state, and local government spending grew by 3.2% to $1.3 trillion, compared with growth of 4.5% in 2011 (CMS, 2013).

Governments at all three levels — federal, state, and local — are striving to decrease their spending on healthcare by reforming both the provider and consumer sides. On the provider side, federal and state governments are reducing the direct funds provided to hospitals and physician centers. On the consumer side, governments are encouraging citizens to obtain individual insurance packages, with the shopping process being improved through centralized web platforms. Nonetheless, it is estimated that government-sponsored spending on health will increase to 50% of total spending by 2022 before decreasing gradually thereafter (CMS, 2013). The main implication of healthcare reform plans is that successive governments — whether Democratic or Republican — will need to comply with the reform framework. Consistent expansion of the private health insurance market and a shift of the financial burden onto the individual will ultimately ease the government deficit situation.

Macroeconomic Impact of Health Insurance Reforms

The U.S. government aims to reduce the federal deficit by more than $1 trillion over the next two decades, and a major initiative toward achieving this goal is through health insurance reforms. The most prominent step taken by the Obama Administration was the introduction of the Patient Protection and Affordable Care Act (PPACA), also known as the ACA or "Obamacare." The act aims to reform the healthcare system by improving the quality and affordability of health insurance through increased private and public coverage. The ACA provides incentives to healthcare providers for delivering better services, regulates the health insurance industry, and enforces the requirement that all applicants be covered under health insurance plans.

Through the ACA, the U.S. government aims to save more than $200 billion over the next ten years (through 2022) and more than $1 trillion by the end of 2032. The Act provides monetary and subsidy rewards for practitioners who improve quality of care and reduce care costs. The bulk of government funds were allocated to insuring people below 138% of the federal poverty level. The ACA aims to register more than 34 million Americans in affordable health coverage by offering them insurance (The Whitehouse, 2012).

The overhaul of the health insurance industry is also aimed at increasing individual insurance rates and including all Americans below 138% of the federal poverty level within the insurance net. Insurance industry reforms now restrict insurers from excluding individuals based on their previous health records or on the basis of lifetime limits. Insurers are also required to cover young adults under the same insurance plan as their parents. The ACA additionally restricts insurance companies from increasing premiums based on pre-existing conditions.

References

CMS. (2013, November). National Health Expenditure Projections 2012–2022. Centers for Medicare & Medicaid Services. Retrieved from http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html

Kolstad, J. T., & Kowalski, A. E. (2012). Mandate-based health reform and the labor market: Evidence from the Massachusetts reform (No. w17933). National Bureau of Economic Research.

The Whitehouse. (2009). Deficit-reducing health care reform. Retrieved from

CBO. (2011, March). The economic case for health care reform. Congressional Budget Office: Executive Office of the President Council of Economic Advisers. Retrieved from http://www.cbo.gov/publication/22077

Leonard, D. (2012, November). Medicare and Medicaid must be cut. Period. Bloomberg Businessweek. Retrieved from http://www.businessweek.com/articles/2012-11-08/medicare-and-medicaid-must-be-cut-dot-period