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Squaring Healthcare with the Economy

Authors: Len Nichols, Director, Health Policy Program, New America Foundation Paul N. Van de Water, Senior Fellow, Center on Budget and Policy Priorities Jennifer F. Baron and Alexander Muggah, Institute for Strategy & Competitiveness, Harvard Business School Thomas Miller, Resident Fellow, American Enterprise Institute Paul B. Ginsburg, President, Center for Studying Health System Change Amanda Austin, Director of Federal Public Policy for the National Federation of Independent Business
December 8, 2009

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As the U.S. Senate debates President Barack Obama's healthcare overhaul, a pressing concern for economists, policymakers, and the business community is how reforms will affect the competitiveness of U.S. businesses and the U.S. economy. Seven experts offer pros and cons that reflect divisions in the country over legislation to revamp a system in which Americans pay nearly double the GDP average of other major developed countries for healthcare.

On the pro side, the New America Foundation's Len Nichols says the legislation would increase business competitiveness by easing employers' burden of growing healthcare costs and providing more efficient care. Paul N. Van de Water, senior fellow at the Center on Budget and Policy Priorities, says Congress and the Obama administration's proposals, which promote insurance industry competition and effectiveness research, deserve more credit for addressing cost controls.

More wary are Jennifer Baron and Alexander Muggah of Harvard's Institute for Strategy and Competitiveness, who say the legislation would expand the public's access to care but does not adequately address the issue of high healthcare delivery costs, which influence business decisions and ultimately inhibit economic growth.

Firmly opposed is the American Enterprise Institute's Thomas Miller, who argues that the House and Senate bills would hamper U.S. competitiveness by shifting healthcare costs from employers to taxpayers. Paul B. Ginsburg, president of the Center for Studying Health System Change, says the reforms could increase U.S. deficits, decrease private investment, and make U.S. production more expensive. Finally, the National Federation of Independent Business's Amanda Austin says small businesses cannot afford the higher costs resulting from the proposed bills. --Roya Wolverson, Staff Writer on Economics, CFR.org

Len Nichols, Director, Health Policy Program, New America Foundation

Rising healthcare costs hamper the ability of U.S. businesses to compete internationally. We at New America have estimated that U.S. manufacturing firms spend almost three times as much per worker per hour for healthcare as our most important foreign competitors--$2.38 versus $0.96. Healthcare costs drive employers to move jobs overseas, grow jobs outside of the United States, and limit the ability of firms to invest to improve productivity [and] compete more effectively in the future.

Many economists argue that employer premium contributions are perfectly offset by reduced wages, so how can health costs affect competitiveness? Traditional economics is grounded in long-run equilibrium, but recurrent and random premium growth prevents equilibrium from ever being reached. Workers' strong preferences for nominal money wages [in other words, to be compensated in terms of money paid, rather than in terms of purchasing power or added benefits] preclude employers from lowering wages to absorb the entire "shock" of higher premiums within one year. A single large shock in premiums would be taken out of wage increases over a few years, but next year's premium shock starts the multiyear cycle, again, every twelve months. So in fact, businesses do bear some of the cost of premium inflation, which is precisely why employers care so much more about it than most economists think they should.

"Health reform legislation now before Congress would begin to slow healthcare cost growth, the outcome employers need most. – Len Nichols

Analysis also shows that the U.S. economy loses as much as $207 billion annually because of the lost productivity stemming from the poor health and shorter lifespan of the uninsured. Employers notice the workplace productivity loss, which for a full-time worker equals four days a month in lost work time.

Health reform legislation now before Congress would begin to slow healthcare cost growth, the outcome employers need most. It would do so by conveying that business as usual--fee for service, "pay for volume"--is over, and by directly changing incentives for higher quality and more efficient care. In addition, investments in health information infrastructure and data on what treatments work best for what patients will benefit all payers--private and public alike.

Some say that we cannot afford health reform in the current economy. But the reality is that U.S. competitiveness cannot afford for us to fail, again.

Paul N. Van de Water, Senior Fellow, Center on Budget and Policy Priorities

Health reform that expands coverage to the uninsured while slowing the growth of healthcare costs is crucial for strengthening the U.S. economy. The soaring growth in healthcare costs is reducing the competitiveness of U.S. businesses, holding down wage growth as businesses shift more employee compensation to cover health insurance costs, and, more than anything else, driving federal budget deficits that are projected to explode in the coming decades.

Fortunately, the House-passed health reform bill and the bill before the Senate take important steps to reduce budget deficits while lowering health costs over time. If enacted in a form that resembles either bill, health reform will improve U.S. competitiveness and boost the living standards of average Americans.

"[The House and Senate bills address] almost all areas that experts have identified as promising areas for reducing the growth of healthcare spending." - Paul N. Van de Water

On the budget front, the House bill would reduce deficits by $138 billion over the next decade and the Senate measure would reduce deficits by $130 billion over that period, says the Congressional Budget Office (CBO), which predicts the two measures would continue to reduce deficits for at least a decade thereafter. The bills would achieve this goal through a combination of spending cuts (largely in Medicare) and tax increases that, together, exceed the costs of bringing health insurance coverage to about 95 percent of all legal residents.

The House and Senate bills deserve much more credit for cost control than they have received. They [address] almost all areas that experts have identified as promising areas for reducing the growth of healthcare spending. Most important, both would create a health insurance exchange to promote competition among private health insurance plans based on price and quality, reduce administrative costs, and provide a platform for systemic change across the healthcare system.

Among other cost-control measures, the House and Senate bills strengthen comparative effectiveness research, expand pilot programs to improve quality and efficiency, simplify healthcare administration, strengthen primary care, and promote efficiencies in Medicare. In addition, the Senate bill would begin to limit excessive healthcare utilization by imposing an excise tax on high-cost health plans.

Jennifer F. Baron and Alexander Muggah, Institute for Strategy & Competitiveness, Harvard Business School

While U.S. healthcare spending has exploded to 16 percent of GDP, the deficit in the value of care delivered is even more of a concern. Value represents health outcomes achieved for the money spent, according to Harvard Professor Michael Porter. The American system fails on both the cost and quality fronts. Unaddressed, an increasingly dysfunctional healthcare system will undermine America's national competitiveness, limiting the ability of businesses to sustain high wages and employment growth.

Employers require healthy workers to keep their businesses, and therefore the economy, growing. Employees and their families who lack effective primary care, prevention, and chronic disease management often cannot be productive members of the workforce. High and rising insurance premiums also influence business decisions. Foreign firms consider employee healthcare costs when deciding whether to establish or maintain U.S. operations. Small businesses and entrepreneurs must balance the benefit of expansion against the burden of covering additional workers.

"[N]either the House nor Senate bills propose meaningful changes to care delivery. Increasing access to coverage without addressing the value of care will fail to contain costs."- Jennifer F. Baron and Alexander Muggah

To support national competitiveness, healthcare reform must go beyond simply expanding access to services. Sustainable reform requires improving the value of both coverage and care.

To address coverage, Congress has proposed several key insurance market reforms. Legislation will require insurers to cover all applicants and prohibit discrimination based on preexisting conditions. Insurance exchanges will improve access to affordable coverage for individuals and small businesses. Coverage mandates will ensure that those who can afford to do so pay into the system, lowering premiums for everyone. While political considerations continue to distort the insurance debate, these steps are a good start.

However, neither the House nor Senate bills propose meaningful changes to care delivery. Increasing access to coverage without addressing the value of care will fail to contain costs. The greatest missed opportunity is the absence of a comprehensive system to measure and transparently report the results of care, [which] can lower costs.

The draft legislation also falls short on reimbursement reform. An effective system must minimize incentives to over-provide (i.e., fee-for-service payment) or under-provide services (i.e., global capitation). Instead, proposed reforms center on creating and expanding pay-for-performance efforts and fail to affect necessary change.

Thomas Miller, Resident Fellow, American Enterprise Institute

Leading versions of healthcare legislation before Congress this year remain more likely to weaken U.S. economic competitiveness, at the margin, than to improve it. The direct impact of higher healthcare costs on the competitiveness of U.S. businesses has been overstated by interest groups either looking to transfer their immediate burdens to others or to enact broader health policy agendas unrelated to competitiveness. Health benefits are largely substitutes for other forms of labor compensation.

Hence U.S. firms have performed well [in the past], despite rising levels of healthcare costs, because high levels of productivity and a favorable investment climate were (and remain) much more important factors in determining competitiveness. As CBO Director Douglas Elmendorf concluded in congressional testimony earlier this year, "[T]he costs of providing health insurance to their workers are not a competitive disadvantage for U.S.-based firms."

"The legislation's complex, layered schemes of mandated costs, cross-subsidies, and taxes will discourage increased labor force participation, work effort, and job growth." – Thomas Miller

We should do better in improving the value of healthcare services. However, the pending bills mostly promise more care and more insurance, with little essential health reform in return. Partially shifting the high cost of health benefits from one set of pockets--employer payrolls--to the pockets of taxpayers (which include business firms and their customers)--will neither reduce their net claim on the overall economy nor strengthen incentives to produce better health outcomes at lower costs. The current bills unfortunately would set us back in that regard. Their most likely results would be further spikes upward in government spending, unfunded entitlement obligations, federal budget deficits, tax burdens, and regulatory drag on the economy; and tighter squeezes on investment, innovation, and human capital development. The legislation's complex, layered schemes of mandated costs, cross-subsidies, and taxes will discourage increased labor force participation, work effort, and job growth.

To improve U.S. competitiveness in international markets, we need not only do less harm in "reforming" healthcare. We should focus on more important and effective policy levers involving taxes (particularly corporate rates), major entitlement programs, and our educational system, while curbing the public sector's overstimulated political appetites.

Paul B. Ginsburg, President, Center for Studying Health System Change

How health reform affects the United State's international competitiveness will depend mostly on whether reform increases the federal budget deficit. At this point, there is substantial uncertainty about whether health reform will, in fact, slow healthcare cost trends. The most concrete provision to slow trends is the Senate bill's 40 percent excise tax on health insurance premiums above a certain threshold, which will induce many to shift to less costly insurance plans. But other reform provisions will require others to obtain more comprehensive insurance than they now have.

"How health reform affects the United State's international competitiveness will depend mostly on whether reform increases the federal budget deficit." - Paul B. Ginsburg

Business leaders tend to believe that slower healthcare cost growth will increase competitiveness by reducing the costs of labor. But most economists believe that employees bear the brunt of expensive health benefits through lower wages. Healthcare costs, however, do affect competitiveness through their effects on federal and state budgets. Long-term budget projections show that the key driver of the U.S. fiscal outlook is rising healthcare costs, including increased spending on Medicare and Medicaid and lost revenue from tax subsidies for employer-based health insurance. In addition, the reform proposals themselves, which appear to reduce the federal deficit, are more likely to hamper deficit-reduction efforts once the recession has eased because the spending cuts and tax increases used to offset the costs of health reform will not be available to reduce the deficit. A deteriorating fiscal situation will crowd out private investment and ultimately lead to higher tax rates, making it more expensive to produce in this country.

So unless policymakers aggressively pursue ways to slow the growth of U.S. healthcare spending, rising health costs in excess of growth in GDP will hamper U.S. competitiveness. The tool with the greatest potential to control healthcare costs is provider-payment reform, but current health reform proposals call only for development and piloting of payment reforms. So whether cost containment is achieved will depend on the pilots' success and subsequent aggressive implementation.

Amanda Austin, Director of Federal Public Policy for the National Federation of Independent Business

Unlike large businesses, which can absorb or compensate for minor mistakes and miscalculations, small businesses can be broken by one bad regulation or one added burden--especially in a volatile and slow economy.

Small business is the group that has the most to gain from reform done right, but it also has the most to lose if it isn't. Wages, profits, jobs, and governments are sinking under swelling healthcare costs. The trend in the current system is unsustainable. For small business, where problems are most immediate and acute, reform requires better insurance markets and delivery systems.

"Reforms that so severely impact one group, in this case job-creating small businesses, will have extreme effects on our economy overall." - Amanda Austin

Small business needs solutions that drive competition and innovation. Solutions, including pooling across state lines, increasing choice in benefit plans, and easing the burden on the business owner, can move the marketplace in a way that promotes choice for employers and employees. This can start to level the playing field with big business.

Small-business owners don't need new costs and taxes with little to no return, excessive benefit mandates that drive up costs, and [brand] new entitlement programs that exacerbate the cost-shifting problem that already plagues the small-business marketplace.

American businesses do not operate in isolation, and neither do the policies that affect them. Reforms that so severely impact one group, in this case job-creating small businesses, will have extreme effects on our economy overall. We need solutions that are fiscally responsible, create a desirable marketplace, and bring about more private market competition.

So when deciding on how to proceed with healthcare reform in the current economy, the first and last question should be: Does this improve the current situation for small business? If it doesn't, we need to fix it to get it right or else small businesses won't be able to lead us out of this recession.

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