US health care reform - an unintended stimulus

By: Adam Posen

            Health care reform legislation – the extension of health insurance to millions of uncovered Americans – will pass the US Congress in some form soon, despite the Democrats’ loss of a Senate seat Even if partial at best,this is a long overdue catch-up of American social justice in an essential area with the rest of the civilized world.  It will be a huge triumph and hugely expensive.  What gets overlooked is that it will also have the effect of being the second US fiscal stimulus package following the global crisis, with substantial effects on the rest of the world as a result.

            In economic terms, health care reform should be thought of as giving a pre-paid debit card for spending on medical services to 30 million people.  Every American already had access to emergency services irrespective of whether they were insured or not. .   But not everybody had access to longer-term medical evaluation and treatment for their families.  For these people, chronic conditions were not dealt with, pharmaceutical prescriptions for heart disease and the like were not available, and prophylactic examinations were out of the question.

            As a result, there is huge pent-up demand for medical services soon to be insured.  Imagine the parent whose child has some lingering breathing problem or awkward limb who now has access to treatment for their child.  Imagine the middle-aged overweight poor person who has heard on TV about all kinds of treatments needed for symptoms from which she suffers – some from public service announcements, some from drug companies’ ads – and now can get a proper examination for diabetes, high-blood pressure, and a host of more obscure ailments. Now imagine those people times 30 million.

            When there have been sudden increases in the franchise of people’s access to health care in the past – in the UK when the National Health Service was created after the war; in Massachusetts over the last few years when it offered universal insurance state-wide – the aggregate statistics show a step pattern. Demand leaps up for a couple of years, until the queue of people who had been unable to access health care is worked through.  It then drops down to a level above the pre-enfranchisement demand, proportional to the increase in covered population.

            Macroeconomically, this is a temporary fiscal stimulus, and a sizable one.  People who by definition have not been paying in to an insurance scheme previously get to spend dollars on medical services.  This will be funded by US government borrowing.  Claims that the current health care package are revenue neutral should not be taken at face value, mostly because such claims understate the likely increase in health care demand and thus expenditure.   When the legislation passes, people will be getting a new entitlement to medical care, limited only to the amount of their needs.

            How large an economic impact will there be?  Estimates vary, but if one assumes that the uninsured population is on average at least as unhealthy as average Americans, and medical services prices will not go down, the minimum must be eleven percent of current spending on health care (30 million is one-ninth of the 260 million currently insured).  Health care spending is about 17% of GDP.  So that would imply 1.9% of GDP in fiscal stimulus a year, until the tax and insurance premia are raised sufficiently to actually cover the spending.

            This estimate is based on a very conservative assumption of a linear increase in demand, since the previously uninsured are disproportionately poorer people who have had health issues neglected, hence there will be pent-up demand.           As a temporary fiscal stimulus, the extension of medical insurance in the US turns out to be pretty well-designed.  It will be spent essentially totally domestically in terms of its first round effects. It will encourage reallocation of investment and employment from overgrown sectors like autos and financial services into health care, which will have sustained growth in demand (even after the initial queues are worked through).  It will go directly into people’s pockets making them feel richer – although the majority of those without health insurance up until now are also those without much if any savings, so this effect will be limited. And it will be reflationary, driving up prices, since the supply of medical professionals and infrastructure is going to be slow to expand, and the richer already insured will pay more privately to avoid delays in getting their accustomed treatment.

            All of this is good short-term, bad long-term for the world economy. Short-term, it means that domestic demand growth in the US will be substantially supported by government action over the next couple of years.   This will sustain a recovery that otherwise might have proven temporary.  Long-term, however, this will only add to the global imbalances, with the US increasingly a deficit nation, because national savings will decline further. As with all good fiscal stimulus measures, it is timely, temporary, and targeted – the key is getting it paid for without having the temporary deficit turn permanent.  But have no doubt, the US is giving itself and the world a second stimulus package by another name.

 

Adam Posen is senior fellow at the Peterson Institute for International Economics in Washington, DC.

           

           

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