Top 4 reasons Obamacare will harm U.S. competitiveness

There are ample reasons to dislike Obamacare, but one of the most important is the predictable adverse effects the new law will have on U.S. competitiveness if it is fully implemented.

Adverse Effect #1: Higher taxes to finance public health care expenditures suppress economic growth and reduce after-tax incomes of firms and families.

A growing share of our health economy is tax-financed. In 2009, federal, state, and local governments accounted for more than six out of every 10 dollars spent on healthcare. By 2021, thanks to the Affordable Care Act (ACA), the government's share will increase to nearly seven out of every 10 dollars. The additional taxes taken to finance that increased spending will suppress economic growth and reduce take-home earnings of families and firms.

When we tax something-be it our work, our purchases, or our savings-we get less of it. This effect can entail what economists call a "deadweight loss." If the government imposed a $1 tax on every $10 of chocolate candy makers produce, it would actually cost our economy more than a dollar. Why? The tax also reduces to incentive for consumers to buy chocolates. So confectioners (and our economy) would lose what individuals would have spent if government hadn't added the tax.

That's why each federal tax dollar shrinks the economy on average by about 25 cents. In fact, the OMB requires federal agencies to use a 25 percent deadweight loss figure when they perform cost-benefit analyses of federal programs financed by taxes. But just as everyone's marginal tax rate is much higher than their average rate, these deadweight losses are much higher on the last dollar taxed than on the average dollar taxed. Thus, if we added new taxes on top of existing taxes, the extra deadweight loss that results is likely to exceed 40 cents per added dollar of taxes rather than only 25 cents. This also means that the distortions created by taxes are largest among those in the highest tax bracket.

Remember that the majority of new taxes under ACA target those in the highest brackets. Consequently, the economic distortions imposed by the hundreds of billions in new taxes are likely to be especially severe. In fact, if the new health care law is honestly scored-including the fiscal adjustments needed to ensure that severe cuts to Medicare providers do not result in devastating reductions in access to care-the deadweight losses in the first decade alone may exceed $500 billion1.

Adverse Effect #2: Increased government borrowing to finance public health care expenditures fuels inflation.

According to the CBO's latest long-term spending projections, the federal government will increase in size by more than 40 percent relative to the economy over the next 75 years. Every penny of that increase can be attributed to growth in federally funded healthcare entitlements, including Medicare, Medicaid, and spending under the new health exchanges.

The 2010 health care law attempted to mask its increased spending by making it appear that proposed changes in Medicare revenue and spending could be used both to extend the life of the Medicare trust fund even as those same dollars were used to create the illusion that this new entitlement was many hundreds of billions of dollars less than it actually will be. Former CBO director Douglas Holtz-Eakin has estimated that after stripping out all the "gimmicks and budgetary games," the ACA will contribute $500 billion to the deficit in its first 10 years and $2 trillion during its first two decades2.

Further increases in U.S. borrowing are unsustainable given that our gross debt to GDP ratio already exceeds 100 percent. To avoid defaulting, we either will have to endure historically unprecedented tax levels or massive price inflation. To illustrate just how badly ACA failed to address the entitlements tsunami, the net present value of all unfunded obligations related to Medicare now exceeds $100 trillion.

Adverse Effect #3: Governments faced with higher health costs reduce investment in infrastructure and education.

Increased tax-financed health spending also will divert resources away from other activities such as building infrastructure or improving education3. Since the end of World War II, federal taxes have averaged 17.7 percent of GDP, and there has only been a single year in which total federal tax collections-inclusive of Social Security and Medicare payroll taxes-have exceeded 20 percent of GDP. This provides fairly strong empirical evidence that there is an upper limit to the levels of taxation that would be tolerated by the American public. Consequently health spending inevitably has and will continue to crowd out what can be spent on other priorities. Indeed, the average state has spent more on Medicaid than on primary and secondary education for most years of the past decade.

Researchers at the Minneapolis Federal Reserve Bank have estimated that the long-run rate of return on every dollar invested in early childhood education may be as high as $8 once all the benefits are taken into account, including crime reduction and the future contribution of students to the economy once they become adults. Thus, whether it happens at the federal, state or local level, the opportunity cost of diverting scarce public dollars away from education and into health care may be considerable. It certainly is not a slam dunk that expanded health spending is the best use of scarce tax dollars.

Adverse Effect #4: Greater government control over U.S. healthcare will erode its margin of advance in medical innovation.

The U.S. currently is a world leader in medical innovation4. We produced more leading diagnostic, therapeutic, and pharmaceutical innovations than the EU and Switzerland combined in recent decades. And more than six of every 10 Nobel Prizes in medicine and physiology awarded since 1948 have gone to Americans.

Despite the growing role of government in American health care, government control over financing and delivery is much greater in all other OECD countries than it is here. In addition to financing a much larger share of their health economies, these other nations also often directly control the prices of providers and of pharmaceuticals. It is reasonable to attribute historical U.S. dominance in medical innovation at least in part to its having a relatively freer health economy.

However, ACA represents a sharp move in the direction of much greater government control over healthcare and, thereby, threatens our margin of advantage in medical innovation. As just one illustration, AEI scholar Scott Gottlieb has demonstrated how the accountable care organizations being promoted under the new law may instead result in local monopolies that both inhibit innovation even as they charge higher prices. Likewise, to the degree that regulations greatly compress the amount of freedom of choice allowed in the health insurance market, consumer welfare inevitably will shrink as patients find it increasingly difficult to tailor the details of their coverage to their own unique circumstances resulting in many more individuals who either have more coverage than they would willingly pay for or less coverage than they desire.

In truth, much of what ails the U.S. health system has its roots in misguided public policies. For example, the shortage of primary care doctors is driven by Medicare payment policies that persistently favor payment for specialty services over primary care. Likewise, the private sector long ago moved away from open-ended fee-for-service payment, but this inherently inflationary and often inefficient payment system persists in the 800 lb. gorilla named Medicare. Medicaid for decades has egregiously underpaid providers, resulting in widespread problems of access to care for our most vulnerable populations. This also results in cost-shifting tens of billions of dollars a year over to private payers.

Conclusion

Unfortunately, the Affordable Care Act threatens to increase the magnitude of every single one of these adverse impacts. Thus, in addition to all its other undesirable effects on health costs, access to care and the federal budget deficit, full implementation of law unequivocally will lead to a deterioration of American competitiveness.

In the end, by stifling market competition to enhance numerous other goals toward improving health care, the federal government is actually damaging our ability to offer a topnotch, continuously improving health care sector for citizens and potential citizens. Surely we can do better than this.

Footnotes

[1] At the margin, these deadweight losses are even larger since they increase with the square of marginal tax rates. The marginal excess burden of each dollar's worth of new taxes on top of existing levels likely exceeds 40 cents on the dollar. This also means that the distortions created by taxes are largest among those with the highest marginal tax rates. And because the lion's share of new taxes under ACA target those in the highest tax brackets, the economic distortions imposed by the roughly $500 billion in new taxes under the ACA are likely to be especially severe.

[2] As well, for every $15 in savings, only $1 is being channeled back to Medicare beneficiaries in the form of enhanced benefits such as preventive health services and filling in the Part D donut hole for a small minority of Medicare beneficiaries. Thus, honestly assessed, the lion's share of the $716 billion in Medicare savings will go to bankroll a new entitlement for the uninsured.

Even leaving aside whether the $716 billion is viewed as saving Medicare or financing expanded coverage, these purported savings are completely unsustainable over the long haul. Medicare's own actuary has estimated that law would result in hospitals eventually being paid 61 percent less by Medicare and Medicaid than by private health insurers and physicians eventually being paid 74 percent less than Medicare. Rather than allow (as the actuary projects) 1/6 of all Part A providers to have negative margins by the year 2019 and 40 percent to be in the red by the year 2050, Congress in all likelihood is going to do what it has done for doctors for more than a decade. It will find a way to bypass the legislatively prescribed cuts mandated by the law, in which case the cost of ACA will balloon massively.

[3] Uwe Reinhardt, "Health Care Spending and American Competitiveness." Health Affairs 1989.

[4] Also, new pharmaceuticals, as a rough approximation, are introduced one to two years earlier in the U.S. than elsewhere. Similarly, the nation enjoys a faster rate of adoption of the newest surgical techniques and advances in anesthesia. And five major U.S. hospitals alone conduct far more clinical trials than any other OECD nation. And with the possible exception of Germany, the U.S. has shorter waiting times for visiting a specialist and for elective surgery than other advanced countries. Consequently, the majority of medical tourists seeking higher-quality care elect to come to the U.S. for their care. Medical tourism admittedly constitutes a relatively small fraction of international trade, but there's no reason to suppose it cannot grow considerably larger in the decades ahead should the U.S. margin of advantage in health care innovation persist.

 

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Christopher J.
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