Squaring Healthcare with the Economy

Leading versions of health care 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 health care 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 health care 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."

We should do better in improving the value of health care 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" health care. 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.

Thomas P. Miller is a resident fellow at AEI.

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