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February 16, 2011

The Real Health Care Job Killer

By

David M. Cutler of Harvard University is one of the most prolific and well-respected health economists in the U.S., if not the world.  He has authored numerous, often highly technical, studies of economic issues in health care, such as the value of various heart attack treatments, a measurement technique for imputing the “dollar” value of health status improvement, and demonstrated that the value of new health care technology is often substantially greater than its usually large cost. He also pioneered the application of statistical methods to new sources of patient-level health data.

So it is unfortunate that such an accomplished researcher has abandoned his usually high standards by allowing his name to be attached to patently inconsistent, and almost absurd, claims in a new paper on the proposed repeal of the Patient Protection and Affordable Care Act – claiming that repealing the law, not enacting it, will be a “job killer.”

The absurdities start in the paper’s title: “Repealing Health Care is a Job Killer:  It Would Slow Job Growth by 250,000 to 400,000 Annually.”  The proposal is not, of course, to repeal “health care,” and Cutler knows it. Health care would remain, even if the new law were repealed.

The claim that repeal will “kill jobs” is based on the idea that lower health care costs will make it easier for employers to hire workers.  That might be worth considering if there were any provisions in the new health reform law that could reasonably be expected to lower “costs.”  (When Cutler’s paper refers to “costs”—a word that economists normally use to refer to some measure of unit costs—it is clear from context that he means “expenditures,” which encompasses prices paid and the quantity of service, regardless of the cost of providing those services.  The confusion between costs and expenditures in health care is a common, but it is curious to see an economist make such an elementary error.)

The specific items Cutler cites as savings fall in to two categories: those which have nothing to do with job-related insurance or employment costs, and those which involve certainly higher spending in the next decade in the hopes of entirely speculative savings later on.

First, there are Medicare cuts (or optimistically, Medicare efficiencies), which will have no direct impact whatsoever on employers or working-age patients. It is one thing to argue that doctors and hospitals would be unable to shift costs to private payers in response to Medicare cuts; but Cutler argues that Medicare-only cuts will result in lower spending by non-Medicare payers as well. He might as well claim that cutting subsidies for public transit will reduce gas prices.

The second category of claimed “cost savings” come from factors that will augment health care spending in the hopes of reducing spending over the long term.  In some cases, the future savings are entirely speculative.  For example, Cutler cites several provisions to fund research and other initiatives. He acknowledges that the CBO estimates this will cost $10 billion, and that the Centers for Medicare and Medicaid Services’ Office of the Actuary estimates these programs will save only $2 billion. But Cutler asserts, without offering any evidence, that because the $2 billion savings is “uncertain” (as are all estimates), they must be higher than $10 billion.

Other provisions are unlikely to produce overall saving at all.  For example, the “increased emphasis on wellness and prevention” may or may not improve health, but the evidence to date shows it does not save money.  In order to “save jobs” as Cutler argues, it is not sufficient for preventive care to make you live longer – it has to save more in medical care than it costs.  That is not the case for most preventive care.

Cutler also ignores important developments since the law was passed in March 2010.  For example, so many employers and insurers have already announced increased premiums as a result of complying with the new law that the administration has responded with new regulations requiring insurers to “justify” premium increases of more than 10%. Even the Obama administration has backed off previous claims that families would save an average of $2,500 annually, and instead is attempting to limit the extent of premium increases.

Instead of reducing costs or expenditures that might affect employers, the health reform law mandates new and expanded benefits, including some that must be provided without co-payments and deductibles.  More coverage means more spending, and spending not covered by co-payments and deductibles has to be paid out of premiums.  Simple arithmetic means premiums must rise under the new law, as both the Obama administration and the Congressional Budget Office have at least tacitly acknowledged. The law also imposes new taxes on medical devices, prescription drugs, and even on health insurance itself—taxes which will be at least partly passed on to employers and workers through higher premiums.

Furthermore, the law mandates that employers provide coverage at the new (higher) premiums or pay a $2,000 penalty per employee. But even if they do offer coverage, they will face a $3,000 “assessable payment” (that is, a new tax) for each employee from a low-income family who chooses to accept a federal premium subsidy. Since the law states that these penalties are not to be credited to anybody’s health insurance premiums—certainly not those of the affected employees—they end up being just taxes that will punish businesses for each job they create or retain – and in some cases punish them more for hiring workers from low-income families.

Clearly, the direct effect of the health reform law is it will increase health-related costs of adding more employees.  John Goodman of the National Center for Policy Analysis has estimated that the cost for minimum-required coverage will average about $2.28 per hour for single employees and $5.89 per hour for those with families.  If anything, these provisions will reduce full-time employment, as employers will find automation, overtime, and part-time employees a better value.

Even Cutler’s research finds that the main driver of the coverage drop in the 1990s was employees’ choices.  As Cutler noted in 2003, “[C]overage declines can be a result of fewer employers offering health insurance, fewer employees being eligible for coverage, or employees declining to enroll. I show that the last of these is quantitatively most important: the decline in employer-provided insurance coverage is largely the result of lower take-up of insurance by those who are offered it.”

Moreover, the number of job losses in the CAP report’s subtitle is undermined in the report, which states: “The estimated employment change by industry in 2016 (omitting health care, which will have more employment).” In other words, Cutler includes jobs lost in non-health industries because of higher health spending, but excludes jobs gained in the health care sector from that same higher health spending.  Since Cutler provides estimated ranges for overall job changes, but specific numbers for each industry (except health care), it is impossible to tell whether he offsets the purported job losses in some industries with the job gains in health care.

Furthermore, an essential point seems to have been missed entirely. When employers and consumers spend more on health care, every dollar they spend is a dollar gained in the health industry. Thus, every dollar’s worth of employment lost in the rest of the economy is offset by a dollar’s worth of employment gained in the health care industry.

Under the new health law, that’s no longer true.  Much of the added spending by employers and consumers will be in the form of taxes and penalties, which will go to the Treasury Department’s general fund, not to the private health care sector. As a result, much of the employment lost in the rest of the economy will not be offset by private industry gains, which leads to more unemployment.

Repealing Obamacare is not a job killer—it’s the repeal of a job killer.

Robert A. Book is a Senior Research Fellow in Health Economics at The Heritage Foundation.

First appeared in Forbes

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