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Does Healthcare Reform Help U.S. Business?

Authors: Neeraj Sood, Director of International Programs, Schaeffer Center for Health Policy and Economics, University of Southern California Robert Graboyes, Senior Healthcare Advisor, National Federation of Independent Business Jennifer Baron, Senior Researcher, Institute for Strategy and Competitiveness, Harvard Business School Thomas Miller, Resident Fellow, American Enterprise Institute
Interviewer(s): Toni Johnson
February 10, 2011

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[Editor's Note: This is part of CFR's Renewing America initiative , which examines how domestic policies will influence U.S. economic and military strength and its ability to act in the world.]

The Patient Protection and Affordable Care Act signed into law in 2010 by President Barack Obama was intended to help lower healthcare costs, expand access to insurance, and improve health services to patients. But the law remains controversial, and some Republicans are attempting to repeal it.

One debate concerning the healthcare overhaul is whether it helps or hurts U.S. business competiveness. Neeraj Sood at the University of Southern California says the law could increase the number of U.S. jobs by 250,000 to 400,000 per year and significantly reduce health spending for businesses. Harvard's Jennifer Baron argues healthcare reform should not only be framed as a means of cost-cutting, but also as a way to improve worker productivity by improving individuals' health. But Bob Graboyes of the National Federation of Independent Business, an opponent of the law, says it is "laden with disincentives for businesses to grow, to innovate, and to hire" and should be repealed. The American Enterprise Institute's Thomas Miller says the law should be "repealed and replaced" not to boost business competitiveness but to improve the value of healthcare.

Neeraj Sood, Director of International Programs, Schaeffer Center for Health Policy and Economics, University of Southern California

In a recent paper (PDF), my colleagues and I show that rising healthcare costs have significantly reduced employment and output growth among U.S. businesses, especially in industries that provide health insurance to a significant fraction of their workforce. These industries also happen to have been hit worst by the recent economic downturn and face increasingly stiff competition from abroad.

Their future competitiveness will depend critically on whether the new law will curb growth in healthcare spending. However, if it was easy, we would have reduced healthcare spending growth decades ago. Therefore, not surprisingly, some believe reform will only expand insurance coverage through subsidies to low-income Americans and expanded eligibility rules for public insurance programs. According to this view, premiums for employer-sponsored coverage will remain unchanged, and thus the competitiveness of U.S. businesses will be largely unaffected by reform.

Future competitiveness will depend critically on whether the new law will curb growth in healthcare spending. However, if it was easy, we would have reduced healthcare spending growth decades ago.

[But] there are several reasons to believe that reform has the potential to reduce healthcare spending. First, reform establishes health insurance exchanges that foster greater competition among insurers by making it easier for individuals and small businesses to shop for insurance. Second, it imposes an excise tax on generous health insurance plans, one of the primary drivers of rising healthcare costs. Finally, it calls for comparative effectiveness research and innovative reimbursement and delivery schemes to improve efficiency in healthcare. This new knowledge can provide a powerful impetus for cost-cutting, which will help make U.S. businesses more competitive globally.

Will it be enough to control rising healthcare costs? Yes, but only if we fully implement the new law's multiple provisions that aim to control costs and quickly put into effect innovations identified by reform. My previous work with David Cutler at Harvard University shows that, in this scenario, healthcare reform will likely increase the number of U.S. jobs by 250,000 to 400,000 per year.

Repealing reform is definitely not the answer. Instead, we should spend our energies building on the new law and pushing for other changes--such as reforming end-of-life care--that might help further control rising healthcare costs.

Robert Graboyes, Senior Healthcare Advisor, National Federation of Independent Business

The new Patient Protection and Affordable Care Act (PPACA) will hurt America's international competitiveness. After nearly a year of shoes dropping, it's clear that it will increase, not decrease costs for business. It introduces years and years of uncertainty that will diminish businesses' capacity to plan for the future. The effects will hit small business especially hard, and small business is the country's engine of job growth and source of much of the economy's innovation.

The healthcare law is laden with disincentives for businesses to grow, to innovate, and to hire. Businesses will experience higher financial and administrative costs, and both effects will diminish American productivity.

The law should be repealed, but the pre-PPACA status quo must not be allowed to return. Meaningful reform can't be defined on a bumper sticker, but we can begin by listing some of the elements that ought to be present and absent in a better-crafted law.

The law should be repealed, but the pre-PPACA status quo must not be allowed to return. Meaningful reform can't be defined on a bumper sticker, but we can begin by listing some of the elements that ought to be present and absent in a better-crafted law.

There should be no individual or employer mandates, fewer benefit mandates, [and] tax equity between the group and individual markets. Also needed is medical malpractice reform, interstate insurance markets, greater reliance on consumer incentives, and defined contribution health insurance options for employers and employees. Above all, a new law should strive to do no harm, and unfortunately, PPACA does a great deal of harm--and, to repeat, especially to small business.

Jennifer Baron, Senior Researcher, Institute for Strategy and Competitiveness, Harvard Business School

U.S. businesses have a substantial and unavoidable stake in the outcome of healthcare reform. Many businesses consider their primary roles within the healthcare system in terms of the cost of employee health benefits. Some employers have responded to premium increases by scaling back or ceasing to offer coverage. However, businesses have a second connection to healthcare delivery that prohibits them from truly disengaging from the system: the indirect costs of poor employee health (e.g. low productivity, absenteeism) are thought to be at least double the spending on benefits. Similarly, efforts to maximize employee health can improve productivity, strengthen loyalty, and attract talented staff.

Few would argue that the 2010 healthcare law is perfect. However, a number of elements are consistent with improving the competitiveness of U.S. businesses, as well as the health of Americans and the affordability of care.

Framing the goal of reform largely in terms of reducing healthcare spending has inhibited progress among all stakeholders, including employers. The U.S. healthcare system must shift from a focus on cost reduction to one of value improvement, where value is defined by patient health outcomes achieved for the money spent. The distinction between value and cost reduction is not just semantics, as many approaches to short-term cost reduction may actually be value destroying. At the extreme, costs can be cut by withholding necessary coverage and care. But over time, these choices can lead to poor health outcomes and increase long-term spending.

Few would argue that the 2010 healthcare law is perfect. However, a number of elements are consistent with improving the competitiveness of U.S. businesses, as well as the health of Americans and the affordability of care. For example, by reducing the number of uninsured, the law lessens the extent to which large employer premiums must subsidize un- or under-compensated care. Expanding public and private coverage will also allow firms to enjoy productivity gains through better employee health. When workers' family members are among the newly insured, employees can spend less time caring for, or worrying about ill relatives. And insurance market reforms such as guaranteed issue and prohibiting lifetime limits on the dollar value of coverage will help to ensure that insurance is there for employees when they need it.

Thomas Miller, Resident Fellow, American Enterprise Institute

The healthcare reform law passed last March promises to do more than enough harm to the quality and cost of U.S. healthcare, as well as the wallets of taxpayers and consumers, without adding its less significant indirect effects on business competitiveness to the economic toll. Many more important factors (not necessarily limited to the latest tweaks of other public policies) determine the competitive fates of American firms in global markets.

The new law should be repealed and replaced--not to boost "competitiveness"--but rather to improve the value of our healthcare, produce better population health, and free some resources for other important purposes.

But for those keeping score at home, the law at best will keep the health cost curve on its previous trajectory rather than bend it any lower. It further disconnects the consumers and purchasers of healthcare from the full costs and real value of the healthcare decisions they face. The health law's purported cost savings and delivery system improvements are a desperate mix of unsustainable provider reimbursement cuts (an old standby), formulaic out-year assumptions (to infinity and beyond), unproven science fair projects, and wishful sightings of health reform unicorns. Much more certain to occur will be various tax and regulatory disincentives that mean slower growth by smaller businesses, reduced labor participation and working hours by lower-wage workers, and less saving and investment by higher-income taxpayers facing new Medicare taxes on their capital income. Other taxes in the law initially imposed on a medley of health industry sectors will eventually be passed through to the pockets of patients and consumers.

The new law should be repealed and replaced--not to boost "competitiveness"--but rather to improve the value of our healthcare, produce better population health, and free some resources for other important purposes. The building blocks of a new reform strategy should include a transition to defined contribution financing (PDF) for taxpayer subsidies devoted to healthcare, more targeted protection of vulnerable populations, realigned incentives that reward better decision-making, more effective competition in measuring and reporting relative performance by healthcare providers, and enhanced insurance portability advantages for those who responsibly seek and maintain continuous insurance coverage.

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